Master Circular – Basel III Capital Regulations - Revision

Treatment of revaluation reserves

Revaluation reserves arising out of change in the value of a bank’s property upon its revaluation may be reckoned as CET1 capital at a discount of 55%, instead of Tier 2 capital, subject to the following conditions:

•        bank is able to sell the property readily and there is no legal impediment;

•        the revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;

•        revaluations are in accordance with Indian Accounting Standards.

•        valuations are obtained, from two independent valuers, at least once in every 3 years;

•        where the value of the property has been substantially impaired, it is to be immediately revalued and appropriately factored into capital adequacy computations;

•        the external auditors have not expressed a qualified opinion on the revaluation;

•        the instructions on valuation of properties are strictly adhered to.

Treatment of foreign currency translation reserve (FCTR)

Banks may reckon foreign currency translation reserve arising due to translation in terms of Accounting Standard (AS)11 as CET1 capital at a discount of 25% subject to the following conditions:

•        the FCTR are shown under Schedule 2: Reserves & Surplus  in the

Balance Sheet of the bank;

•        the external auditors of the bank have not expressed a qualified opinion on the FCTR.

Treatment of deferred tax assets (DTAs)

(i)  Deferred tax assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1 capital.

(ii)   DTAs which relate to timing differences may be recognised in the CET1 capital up to 10% of a bank’s total CET1 capital.

(iii) Further, the limited recognition of DTAs as at (ii) above, along with limited recognition of significant investments in the common shares of unconsolidated financial entities taken together must not exceed 15% of the CET1 capital. However, banks shall ensure that the CET1 capital arrived at after application of the 15 % limit should in no case result in recognising any item more than the 10% limit applicable individually.

(iv) The amount of DTAs which are to be deducted from CET1 capital may be netted with associated deferred tax liabilities (DTLs) provided that:

•        Both the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority;

•        the DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets; and

•        the DTLs must be allocated on a pro rata basis between DTAs subject to deduction from CET1 capital as at (i) and (ii) above.

(v)  The amount of DTAs which is not deducted from CET1 capital will be risk weighted at 250% as in the case of significant investments in common shares not deducted from bank’s CET1 capital.

Calculation of 15% of common equity limit on items subject to limited recognition

1.  Banks must follow the 15% limit on significant investments in the common shares of unconsolidated financial institutions and deferred tax assets arising from timing differences.

2.  The recognition of these specified items will be limited to 15% of Common Equity Tier 1 (CET1) capital, after the application of all deductions. To determine the maximum amount of the specified items that can be recognised*, banks should multiply the amount of CET1** by 17.65%.

3.  As an example, take a bank with Rs.85 of common equity.

4.   The maximum amount of specified items that can be recognised by this bank in its calculation of CET1 capital is Rs.85 x 17.65% = Rs.15. Any excess above Rs.15 must be deducted from CET1.

Based on RBI Circular dt 01/03/16. Please visit www.rbi.org.in for any further clarification if required….. Poppy