Source: BS
Context:
The Reserve Bank of India (RBI) has revised rules on perpetual debt inclusion in banks’ capital structure, allowing a higher share of such debt raised overseas to count towards Additional Tier-1 (AT1) capital.
What is Perpetual Debt?
- A type of debt instrument that has no maturity date.
- Banks pay interest (coupon) on it indefinitely, but principal is not repaid.
- Treated as quasi-equity in regulatory terms.
RBI’s New Guidelines
- Earlier Rule: Perpetual debt up to 1.5% of Risk-Weighted Assets (RWA) could be counted in AT1 capital, but less than half was allowed from foreign currency or rupee-denominated bonds issued overseas.
- New Rule (Sept 2025): Entire 1.5% of RWA can now be raised overseas, either in foreign currency or in rupees issued abroad.
- Impact: Gives banks more flexibility to access cheaper global funds.
Why It Matters
- Strengthens Core Capital: AT1 capital is part of banks’ Basel-III capital framework, critical for absorbing financial shocks.
- Diversified Funding: Reduces over-reliance on domestic markets, allowing banks to tap global investors.
- Boosts Lending Capacity: Higher capital adequacy means more room to expand credit.
Related Concepts
- Risk-Weighted Assets (RWA): Bank assets (like loans, investments) adjusted for risk levels; used to calculate minimum capital requirements.
- Additional Tier-1 (AT1) Capital: The core capital of banks, consisting of equity and perpetual instruments, used to absorb losses while the bank is still a going concern.
