The Reserve Bank of India has issued the Commercial Banks – Prudential Norms on Capital Adequacy (Fourth Amendment) Directions, 2026, introducing important refinements to align capital adequacy treatment with the latest asset classification and provisioning framework.
This amendment builds on the existing 2025 Directions and follows the release of the updated norms on asset classification, provisioning, and income recognition in 2026. Exercising its powers under Section 35A of the Banking Regulation Act, 1949, the central bank has undertaken these changes in the interest of strengthening prudential regulation and ensuring consistency across regulatory frameworks.
A key feature of the amendment is the introduction of a new definition through insertion of Paragraph 31A. This provision formally links the concept of “Stage 1, Stage 2, and Stage 3” exposures to their definitions under the 2026 Asset Classification Directions. This harmonisation ensures that capital adequacy calculations are directly aligned with the evolving expected credit loss (ECL)-based framework.
Further, the amendment revises the treatment of provisions eligible for inclusion in Tier 2 capital. General provisions or loan-loss reserves held against unidentified future losses specifically those relating to Stage 1 and Stage 2 assets, will continue to qualify for inclusion in Tier 2 capital. Additionally, excess provisions arising from the sale of non-performing assets (NPAs) may also be included. However, such inclusion is subject to an overall cap of 1.25 percent of total credit risk-weighted assets (RWAs) under the standardised approach. The Directions also clarify that banks have the option to either net off floating provisions against gross NPAs or include them within Tier 2 capital, providing operational flexibility.
On the other hand, provisions linked to identified deterioration in asset quality are explicitly excluded from Tier 2 capital. This includes specific provisions on Stage 3 exposures (NPAs), whether assessed individually or at a portfolio level. It also covers provisions arising from restructuring-related diminution in asset value and depreciation in investments. This distinction reinforces the principle that only general, non-specific buffers can be recognised as regulatory capital.
In addition to these changes, certain legacy provisions have been removed to streamline the framework. Paragraph 130(2) and the note to Paragraph 223 have been deleted, indicating a move toward simplification and removal of redundant guidance.
These amendments will come into effect from April 1, 2027, giving banks sufficient time to align their systems, capital planning processes, and regulatory reporting frameworks. Overall, the changes represent a significant step toward integrating capital adequacy norms with modern credit risk assessment practices, enhancing transparency, comparability, and resilience within the banking sector.
