RBI Relaxes Regulations Allowing Banks to Include Quarterly Earnings in Capital Calculations
Reserve Bank Eases Norms for Banks to Include Current Year Profits in Capital Adequacy Calculations
The Reserve Bank of India (RBI) has eased norms for banks to include current year profits in their capital adequacy calculations on a quarterly basis by removing an additional qualifying condition. As per extant guidelines, banks are permitted to include quarterly profits to capital, albeit with an "additional qualifying condition" related to non-performing assets (NPAs).
The RBI has amended the provision relating to inclusion of quarterly profits in Common Equity Tier 1 (CET1) capital by a bank through a circular. The Reserve Bank of India (Commercial Banks - Prudential Norms on Capital Adequacy) Fifth Amendment Directions, 2026, states that a bank may reckon the profits in the current financial year for capital to risk weighted assets ratio (CRAR) calculation on a quarterly basis subject to certain conditions, including a prescribed formula.
The RBI has also issued similar directions for small finance banks and payments banks. Previously, in April, the RBI had issued draft amendment directions and sought feedback from stakeholders. However, in their feedback, stakeholders suggested retaining yearly CET1 accounting with quarterly reviews, which the RBI did not accept.
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Comparison of Capital Adequacy Norms:
| Category | Original Norms | Revised Norms |
|---|---|---|
| Inclusion of quarterly profits | Quarterly profits can be included, subject to additional qualifying condition related to NPAs | Quarterly profits can be included, subject to prescribed formula |
| Frequency of audit or limited review | Audit or limited review of financial statements on a yearly basis | Audit or limited review of financial statements on a quarterly basis |
The RBI's decision is expected to have a significant impact on the banking sector, allowing banks to more accurately reflect their financial performance and position. The revised norms are a step towards simplifying the capital adequacy framework and promoting a more efficient use of capital.
Investor Takeaway
Banks may now include quarterly earnings in capital calculations, potentially improving their capital adequacy ratios.
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