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Banks (Finance)

RBI Changes Capital Requirement for Banks' Investments in Financial Entities

Strategic Insights

— 1 min read

The Reserve Bank of India (RBI) has recently issued a notification announcing a change in the capital requirement for banks' investments in financial entities. As per the new guidelines, investments in paid-up equity of financial entities, even those exempted from capital market exposure norms, will now attract a 125% risk weight or risk weight warranted by external rating. This change is aimed at linking the risk weight and capital requirement to the risk characteristics of the investment, regardless of whether it is exempted from CME norms or not.

Key Takeaways:

  • The RBI has changed the capital requirement for banks' investments in financial entities, making them subject to a 125% risk weight or risk weight warranted by external rating.
  • This new rule applies to investments in paid-up equity of financial entities, even those exempted from capital market exposure norms.
  • The risk weight and capital requirement will now be linked to the risk characteristics of the investment, rather than being exempted from CME norms.
  • Banks' capital market investments in the banking book, including those exempted from CME norms, will attract a risk weight of 125% or higher.
  • If these investments are in the trading book, they will attract a capital charge of 20.25% or higher.
  • This new instruction will be applicable from January 1, 2012.
  • The change is aimed at strengthening the prudential guidelines on capital adequacy and market discipline.

Statistics:

  • The new risk weight of 125% will be applied to banks' investments in paid-up equity of financial entities.
  • The capital charge on gross equity position will increase to 11.25% for investments in the banking book.
  • For investments in the trading book, the capital charge will increase to 20.25% or higher.

Sources:

  • Reserve Bank of India (RBI); Master Circular No. DBOD.No.BP.BC.11/ 21.06.001/2010-11 dated July 1, 2011 [1]
  • RBI Notification: http://rbi.org.in/scripts/NotificationUser.aspx?Id=6516&Mode=0

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