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RBI Imposes 10% Ceiling on Bank and FI Investments in Capital Instruments

Strategic Insights

— 1 min read

The Reserve Bank of India (RBI) has issued new prudential norms on capital adequacy-cross holding of capital among banks or financial institutions (FIs), introducing a 10% ceiling on investments by banks or FIs in all types of capital instruments, including equity and preference shares. This move aims to regulate excessive capital exposure and ensure healthy risk management practices among banks and FIs. Banks and FIs are also prohibited from acquiring fresh stakes in banks' equity shares if the investment would exceed 5% of the investee bank's equity capital.

Key Takeaways:

  • A 10% ceiling has been imposed on investments by banks or FIs in all types of capital instruments, including equity, preference shares, subordinated debt, hybrid debt capital, and other instruments approved as in the nature of capital.
  • Banks or FIs are prohibited from acquiring fresh stakes in a bank's equity shares if the investment would exceed 5% of the investee bank's equity capital.
  • Investments in equity capital of subsidiaries are deducted from tier I capital for capital adequacy purposes.
  • Investments in instruments not deducted from tier I capital attract 100% risk weight for credit risk for capital adequacy purposes.
  • Banks or FIs that currently exceed the limits specified may apply to RBI within 45 days with a roadmap for reducing exposure within prudential limits.
  • The 10% limit on tier II bonds issued by other banks and FIs remains in place, as per the September 2002 circular.
  • The RBI will review and may modify these norms as necessary to ensure compliance and risk management.

Statistics:

  • 10% ceiling on investments by banks or FIs in all types of capital instruments.
  • 5% threshold for acquiring fresh stakes in a bank's equity shares.
  • 45 days to reduce exposure within prudential limits for banks or FIs that currently exceed specified limits.
  • The September 2002 circular established a 10% limit on tier II bonds issued by other banks and FIs.

Sources:

  • Reserve Bank of India (RBI) - Notification on prudential norms on capital adequacy-cross holding of capital among banks or FIs.
  • PTI - July 7, 2023 - RBI imposes 10% ceiling on bank and FI investments in capital instruments.

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