The RBI says Tier 1 capital comprising pure equity and statutory and capital reserves must be at least 7 per cent and total capital must be at least 9 per cent of risk-weighted assets (RWAs).

In order to strengthen risk management mechanism, the Reserve Bank today issued draft guideline envisaging that the equity capital of a bank should not be less than 5.5 per cent of risk-weighted loans.      

"Common Equity Tier 1 (CET 1) capital must be at least 5.5 per cent of risk-weighted assets (RWAs)," RBI said in the draft guideline for implementation of Basel III capital regulation in India.

Besides, it also recommends, Tier 1 capital comprising of pure equity and statutory and capital reserves must be at least 7 per cent and total capital must be at least 9 per cent of RWAs.

Besides, it has also suggested for setting up of the capital conservation buffer in the form of Common Equity of 2.5 per cent of RWAs.

It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2017, it said.

However, it said, the capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2017.

It also said that the instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022.       

The central bank has invited comments and feedback on the draft guidelines, including implementation schedule by  February 15, 2012. RBI Governor D Subbarao had said earlier this month that Indian banks will have to incur additional costs to build  capital buffers to comply with Basel III rules.

Though the Indian banking sector was comfortably placed to implement Basel III regulations, some banks might need additional capital, he had said.

"On aggregate, banks are comfortably placed in terms of capital adequacy, but a few individual banks may fall short due to implementation of Basel III," he had said.

Currently, RBI follows Basel II norms under which Tier I component is not only pure equity capital but Perpetual Non-cumulative Preference Shares (PNCPS), Innovative Perpetual Debt Instruments (IPDI) and capital reserves. 

Banks are required to maintain a minimum Capital to Risk weighted Assets Ratio (CRAR) of 9 per cent within this Tier 1 capital should be at least 6 per cent of risk weighted assets.

Under the existing capital adequacy guidelines based on Basel II framework, total regulatory capital is comprised of  Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).

The draft norms have been adopted from the Basel Committee on Banking Supervision (BCBS) that issued a comprehensive reform package entitled 'Basel III: A global regulatory framework for more resilient banks and banking systems' in December 2010.

The objective of the draft guideline is to improve the banking sector's ability to absorb shocks arising from  financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.

The reform package relating to capital regulation, together with the enhancements to Basel II framework and amendments to market risk framework issued by BCBS in July 2009, will amend certain provisions of the existing Basel II framework, in addition to introducing some entirely new concepts and requirements, it said. (PTI)