RBI Raises Overseas Perpetual Debt Limit for Banks

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.