The Reserve Bank of India has allowed banks to issue additional Tier 1 capital instruments, the principal amount of which would absorb losses, either through conversion into common shares or a write-down mechanism that allocates the losses to the instruments, either temporarily or permanently.

Unveiling a slew of amendments in the implementation of the Basel 3 regulations, the RBI said that banks must have a provision of Point of Non-Viability (PONV) for every non-equity instrument which, when triggered, would lead to a conversion to common shares (of the bank) or a permanent write-off.

The regulator has reduced the minimum tenor after which call options are permissible in perpetual debt instruments from 10 to five years.

The minimum maturity of Tier 2 debt instruments has also been reduced from 10 to five years.

Admissibility limits

The limits on admissibility of excess additional Tier 1 and Tier 2 capital for computing and reporting Tier 1 capital and CRAR (capital adequacy ratio) have been withdrawn. Accordingly, a bank having met the minimum capital requirements may admit excess additional Tier 1 and Tier 2 capital for the purpose of reporting.

For exposure limits, capital funds is the sum of all eligible common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital, net of regulatory adjustments and deductions.

Banks have also been allowed to issue additional Tier 1 and Tier 2 debt capital instruments to retail investors, subject to their enhancing investor awareness and board approval.

For issuing Tier 2 capital, banks have to clearly explain to the investor the loss absorbency features of the instrument and get the investor’s confirmation that these features are clear to him.

Finally, banks need not pay coupons on perpetual debt instruments (PDI) if these are likely to result in a loss during the current year.

This has to be indicated in the offer document,

Capital buffer

“However, payment of coupons on PDIs from the revenue reserves is subject to the issuing bank meeting minimum regulatory requirements for common equity Tier 1, additional Tier 1 and total capital ratios at all times and subject to the requirements of capital buffer frameworks (capital conservation buffer, countercyclical capital buffer and domestic systemically important banks),” the RBI said.

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