Prudential Norms on Capital Adequacy for Local Area Banks
The Reserve Bank of India has issued directions on prudential norms for capital adequacy for Local Area Banks.
The directions are applicable to all Local Area Banks and aim to ensure their financial stability and soundness.
The capital adequacy framework consists of two tiers: Tier I (core capital) and Tier II (supplementary capital).
Tier I capital includes elements such as paid-up equity share capital, disclosed free reserves, and retained earnings.
Tier II capital includes elements such as undisclosed reserves, revaluation reserves, general provisions, and loss reserves, hybrid debt capital instruments, and subordinated debt.
The directions also specify deductions from capital funds, limits for Tier II elements, and norms on cross-holdings.
Additionally, the directions cover capital charges for credit risk and market risk, including scope and coverage of capital charge.
The purpose of these directions is to ensure that Local Area Banks maintain a minimum level of capital to absorb potential losses and maintain financial stability.
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