The Reserve Bank of India (RBI) has proposed changes to the leverage ratio rules for banks.
The move is aimed at bringing India’s banking capital rules in line with the latest global standards set by the Basel Committee on Banking Supervision (BCBS).
The RBI has released a draft amendment to its prudential norms on capital adequacy and has invited comments from banks and other stakeholders.
What Is the Leverage Ratio?
The leverage ratio is an important safeguard used to check how much debt and exposure a bank is taking on compared with its core capital.
It is calculated by dividing a bank’s Tier 1 capital by its total exposure.
Unlike risk-based capital requirements, the leverage ratio provides an additional safety check for banks, helping prevent excessive borrowing and balance-sheet expansion.
Under the proposed rules, the RBI plans to keep the minimum leverage ratio at:
4% for Domestic Systemically Important Banks (D-SIBs)
3.5% for other banks
This means the basic minimum requirement for Indian banks will remain unchanged under the proposal.
New Rules for Global Banks Operating in India
The RBI has proposed separate requirements for branches of Global Systemically Important Banks (G-SIBs) operating in India.
These branches will have to maintain a leverage ratio of 3.5% plus the leverage ratio buffer applicable to their parent G-SIB.
Any additional buffer required by the bank’s home-country regulator will also have to be taken into account.
The aim is to ensure that branches of major global banks operating in India maintain adequate capital protection.
Restrictions If a Bank Falls Below the Buffer
The draft rules also propose restrictions on certain capital distributions if a G-SIB branch fails to meet its required leverage ratio buffer.
The level of restriction will depend on two factors:
The branch’s Common Equity Tier 1 (CET1) capital ratio
Its leverage ratio
In simple terms, a bank that falls below the required buffer could face restrictions depending on the strength of its overall capital position.
RBI Balances Could Get Temporary Exemption
Another important proposal relates to money banks keep with the RBI.
In exceptional macroeconomic circumstances, the RBI may temporarily exclude banks’ balances maintained with the central bank from the calculation of their leverage ratio exposure.
The purpose would be to help the RBI implement monetary policy more effectively during unusual economic conditions.
However, such an exemption would not simply reduce the capital requirement.
If the exclusion is allowed, the minimum leverage ratio requirement would be increased proportionately.
Banks would also have to disclose the impact of the exemption.
RBI Seeks Public Comments
The latest changes are currently only at the draft stage.
The RBI has invited comments and suggestions from banks, industry participants and other stakeholders on the proposed directions.
Stakeholders can submit their feedback to the RBI by August 28.
The proposed framework is part of the RBI’s broader effort to align India’s banking regulations with international standards while maintaining a strong safety cushion in the banking system.
