RBI tightens leverage ratio rules, keeps minimum capital thresholds unchanged
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The RBI has tightened how banks calculate leverage by widening the measurement of derivatives, repo transactions and off-balance-sheet exposures, while retaining the minimum ratios at 4% for systemically important banks and 3.5% for others. The norms, effective April 1, 2027, also strengthen disclosure requirements and restrict the use of collateral and netting to reduce reported exposures.
The Reserve Bank of India has tightened the framework for measuring banks’ total exposure, including loans, investments, derivatives and off-balance-sheet commitments, against their Tier 1 capital. It retained the minimum leverage ratios at 4% for domestic systemically important banks and 3.5% for other banks, with the revised rules taking effect from April 1, 2027.The leverage ratio acts as a check on excessive borrowing and balance-sheet expansion, regardless of the risk assigned to individual assets. The revised framework standardises the treatment of exposures from derivatives, securities-financing transactions such as repos and reverse repos, and off-balance-sheet items such as guarantees, letters of credit and undrawn commitments, giving the RBI a clearer picture of banks’ overall leverage.
Also Read: RBI proposes a leverage ratio of 3.5% for ‘important’ global banks
Banks will not be permitted to use collateral, guarantees, credit-risk mitigation or accounting netting to reduce their exposure unless specifically allowed under the directions. The RBI has also prescribed detailed treatment for cash-pooling arrangements, unsettled securities transactions and banks acting as agents in securities-financing transactions.
The regulator has, however, provided operational relief to banks with smaller derivatives businesses. Banks with an international presence or outstanding derivatives of ₹25,000 crore or more, calculated on a consolidated group-wide basis, will have to use the Standardised Approach for Counterparty Credit Risk, or SA-CCR. Other banks may continue using the simpler Current Exposure Method or adopt SA-CCR, as applicable.
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The RBI rejected a suggestion to fully align the calculation of derivative exposures under the leverage ratio with the risk-based SA-CCR framework. It said collateral received generally cannot reduce replacement cost, while the multiplier used to calculate potential future exposure will remain fixed at one because the leverage ratio is a non-risk-based measure.
Indian branches of global systemically important banks will have to maintain a leverage ratio of 3.5% plus the applicable G-SIB buffer, including any additional buffer prescribed by their home regulator. A breach of the buffer could lead to restrictions on distributions, including the repatriation of profits to the head office.
The regulator rejected requests to cap the requirement for these branches at the level prescribed by their home jurisdiction, lower it to the Basel minimum of 3%, or calibrate it according to the activities and systemic importance of the Indian branch.
Banks will have to always comply with the minimum leverage ratio, although the reported ratio will be calculated using quarter-end capital and exposure figures. Requests to calculate exposures using daily or monthly averages will be considered by the RBI on a case-by-case basis.
The framework also allows the RBI to temporarily exclude balances maintained with the central bank from the exposure measure during exceptional macroeconomic circumstances. Any such relief will be accompanied by a corresponding recalibration of the minimum leverage ratio, and banks will have to disclose their ratios both with and without the exemption.
The RBI declined to prescribe advance quantitative triggers for granting the exemption, saying the Basel framework does not specify such parameters. It also rejected requests to defer the April 2027 implementation date.
The directions strengthen the RBI’s supervisory powers where reported exposures do not adequately capture a bank’s leverage. The regulator may seek additional information, require improvements in leverage management or impose a Pillar 2 capital charge where transactions could lead to excessive leverage or destabilising deleveraging.
Banks will also face expanded quarterly disclosure requirements on standalone and consolidated bases. These include a reconciliation of accounting assets with leverage exposures and details of different exposure categories. Disclosures covering average and quarter-end securities-financing exposures will give the regulator and markets greater visibility into changes around reporting dates.
The RBI also agreed to modify the reporting format on its Centralised Information Management System, if required, to align it with the revised directions.
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Figures reflect the source report and its stated period. This article is for information and is not investment advice.
