RBI releases draft Master Direction on Prudential Regulation for AIFIs – 2021.

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The Reserve Bank of India on 22nd October 2021 has published the Draft Reserve Bank of India (Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation and Operation of Investment Portfolio Norms and Resource Raising Norms for All India Financial Institutions) Directions, 2021.

These Directions shall be applicable to the All India Financial Institutions (AIFIs) regulated by Reserve Bank of India, viz. EXIM Bank, NABARD, NHB and SIDBI.

The AIFIs shall implement all the three Pillars of Basel III capital regulations. Under Pillar 1, the AIFIs shall adopt the standardized approaches for measurement of capital charge for credit risk and market risk. For operational risk, AIFIs shall adopt the Basic Indicator Approach. The AIFIs will implement other approaches as envisaged under Basel III as and when banks will adopt these approaches

The Capital Adequacy Framework rests on three components or three Pillars. Pillar 1 is the Minimum Capital Ratio while Pillar 2 and Pillar 3 are the Supervisory Review Process (SRP) and Market Discipline, respectively.

The objective of the SRP is to ensure that AIFIs have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. This in turn would require a well-defined internal assessment process within AIFIs through which they assure the RBI that adequate capital is indeed held towards the various risks to which they are exposed.

RBI has sought comments on the Draft regulation by 30th November 2021 from the stakeholders which may be submitted by email with the subject line “Feedback on Draft Reserve Bank of India (Prudential Regulations for All India Financial Institutions) Directions, 2021”

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