The Reserve Bank of India on 26th October 2021 has published the Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021 which shall be applicable to all Local Area Banks, licensed to operate in India by the Reserve Bank of India.
This Master Direction covers instructions regarding the components of capital and the capital required to be provided for by banks for credit and market risks. These Directions serve to specify the prudential norms from the point of view of capital adequacy.
The Banks are required to maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis and the capital funds shall consist of the sum of Tier I Capital and Tier II Capital.
Perpetual Non-Cumulative Preference Shares (PNCPS) shall be eligible for inclusion as Tier I capital subject to compliance with the minimum regulatory requirements and the Tier II capital shall consist of undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid debt capital instruments, subordinated debt and investment reserve account.
Banks shall not enter into swap transactions involving conversion of fixed rate rupee liabilities in respect of Tier I/Tier II bonds into floating rate foreign currency liabilities.
The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Tier I Preference Shares shall be taken into account for the purpose of calculating reserve requirements
The total amount raised by the bank by issue of PNCPS shall, however, not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, shall not attract CRR / SLR requirements.
