Basel III Capital Requirements in India
Minimum capital ratios, the capital conservation buffer, leverage ratio and liquidity ratios as applied by RBI.
Key points
- Minimum Common Equity Tier 1 (CET1): 5.5% of risk-weighted assets.
- Capital Conservation Buffer (CCB): 2.5%, held in CET1.
- Minimum total capital (CRAR): 9%; with CCB, 11.5%.
- Leverage ratio: 4% for D-SIBs and 3.5% for other banks.
- Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR): at least 100%.
Why capital matters
Capital absorbs unexpected losses so that depositors are protected and a bank can keep lending in bad times. India's requirements are stricter than the global Basel III minimums – for example, the minimum total capital is 9% against 8% under Basel.
Capital ratios
| Component | Minimum (% of RWA) | With CCB |
|---|---|---|
| Common Equity Tier 1 (CET1) | 5.5% | 8.0% |
| Tier 1 capital | 7.0% | 9.5% |
| Total capital (CRAR) | 9.0% | 11.5% |
Components of capital
- CET1: paid-up equity, share premium, statutory and capital reserves, other disclosed free reserves and balance in P&L account, less regulatory deductions.
- Additional Tier 1 (AT1): perpetual non-cumulative preference shares and perpetual debt instruments with loss-absorption features.
- Tier 2: general provisions and loss reserves (within limits), subordinated debt with minimum maturity of 5 years, and other eligible instruments.
Buffers
- Capital Conservation Buffer (2.5%): if a bank dips into it, restrictions apply on dividends and bonuses.
- Counter-Cyclical Capital Buffer (0–2.5%): can be activated by RBI in boom periods; it has not been activated so far.
- D-SIB surcharge: Domestic Systemically Important Banks (SBI, HDFC Bank, ICICI Bank) must hold additional CET1 according to their bucket.
Risk-weighted assets
Capital is measured against risk-weighted assets for credit risk, market risk and operational risk. Riskier exposures carry higher weights – for example, claims on the Government of India carry 0% risk weight, while unrated corporate loans generally carry 100%.
Liquidity standards
| Ratio | Meaning | Minimum |
|---|---|---|
| LCR | High-quality liquid assets ÷ net cash outflows over 30 days of stress | 100% |
| NSFR | Available stable funding ÷ required stable funding over one year | 100% |
| Leverage ratio | Tier 1 capital ÷ total exposure (not risk-weighted) | 4% (D-SIBs), 3.5% (others) |
Exam tip: The three pillars of Basel are Pillar 1 – minimum capital, Pillar 2 – supervisory review (ICAAP), and Pillar 3 – market discipline through disclosures.