Objective
The Reserve Bank of India (RBI) has issued a Master Circular on Prudential Guidelines on Capital Adequacy and Market Discipline, introducing the New Capital Adequacy Framework (NCAF) to ensure banks’ stability and resilience.
Key Components
The NCAF consists of three pillars:
- Pillar 1: Minimum Capital Requirements – sets minimum capital requirements for credit, market, and operational risks.
- Pillar 2: Supervisory Review Process – involves supervisory review and evaluation of banks’ risk management systems and capital adequacy.
- Pillar 3: Market Discipline – promotes transparency and disclosure to enable market participants to assess banks’ risk profiles and capital adequacy.
Capital Requirements
Banks must maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9%, comprising:
- Tier I capital – minimum 5.5% of risk-weighted assets.
- Tier II capital – up to 3.5% of risk-weighted assets.
Risk-Weighted Assets
Risk-weighted assets are calculated based on credit risk, market risk, and operational risk.
Implementation
The NCAF is applicable to all commercial banks, with a phased implementation timeline.
Conclusion
The NCAF aims to enhance banks’ capital adequacy, risk management, and transparency, ultimately promoting financial stability and resilience.
Chat with the Master Circular: