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RBI amends asset recognition norms to boost banks’ capital base

The Reserve Bank of India on Tuesday made some amendments to the treatment of certain balance sheet items of banks, in effect boosting their regulatory capital and aligning it with the internationally adopted Basel III capital standards.

As per the new rules, banks will be allowed to recognise part of their real estates assets, foreign currency assets and deferred tax assets as capital with suitable hair cuts.

This comes in the wake of the regulator forcing banks to recognise more stressed assets as non-performing assets (NPAs) leading to the enhanced capital requirement.

“The existing capital adequacy guidelines were reviewed for the purpose of aligning the definition of regulatory capital with the internationally adopted Basel III capital standards, issued by the Basel Committee on Banking Supervision (BCBS),” an RBI release said. 

The salient features of the amendments, applicable with immediate effect, are as follows:

• Revaluation reserves due to change in the carrying amount of a bank’s property (consequent upon its revaluation) will be considered as Tier 1 instead of Tier 2 capital and will continue to be reckoned at 55 percent discount.

• Foreign currency translation reserves due to translation of financial statements of a bank’s foreign operations to the reporting currency may be considered as Tier 1 capital and will be reckoned at a 25 percent discount.

• Deferred tax assets arising due to timing differences may be recognised as Tier 1 capital up to 10 percent of a bank’s Tier 1 capital.

Speaking to CNBC-TV18, RK Bakshi, Former ED, Bank of Baroda , says this comes as a positive step for a capital deficient country. The policy will be bank-specific with many small banks benefiting, he says, adding, say if a bank has properties worth Rs 5,000-6,000 crore, it can be translated to Rs 3,000 crore—almost 1 percent of their risk weighted assets.

Foreign exchange translation reserves will benefit banks with operations which have foreign operation like  Bank of India , Bank of Baroda, State Bank of India , he adds.