Source: BS
Context:
The Indian central bank has raised the limit for perpetual debt that banks can raise overseas and use as part of their core capital, according to a circular
Key Highlights:
- Regulator: Reserve Bank of India (RBI) issued a circular allowing banks to raise perpetual debt overseas and include it in their core capital.
- Perpetual Debt: A type of debt without a fixed maturity date, often used by banks to strengthen capital buffers.
- Purpose: Eligible for inclusion in Additional Tier-1 (AT1) capital, which forms part of a bank’s core capital under Basel III norms.
- Additional Tier-1 (AT1) Capital: Additional Tier-1 (AT1) capital is a component of a bank’s regulatory capital that is perpetual in nature (no fixed maturity) and absorbs losses to help banks remain solvent during financial stress.
- It is part of the Tier-1 capital, which is considered core capital, along with Common Equity Tier-1 (CET1).
Updated Guidelines
- Limit for AT1 Inclusion: Banks can now include up to 1.5% of Risk-Weighted Assets (RWA) through perpetual debt.
- Risk-Weighted Assets (RWA): Risk-Weighted Assets (RWA) are a bank’s assets weighted by credit risk. They represent the total assets of a bank adjusted for the riskiness of each asset, rather than just the raw book value.
- Foreign Issuance: Debt issued in foreign currency or in Indian rupees overseas can now be fully counted towards the 1.5% AT1 limit.
- Earlier Norms: Previously, only less than half of the 1.5% AT1 limit could be raised overseas, the rest had to be domestic.
Significance
- Strengthens Bank Capital: Helps banks bolster their core capital to meet regulatory requirements.
- Flexibility: Provides banks with more leeway to raise funds globally, improving capital adequacy and liquidity.
- Cost Advantage: Overseas debt may offer competitive interest rates and access to a broader investor base.
