15.4 Basel III Capital Framework, Prompt Corrective Action & D-SIBs
Key Takeaways
- Under the RBI's Basel III rules, banks need minimum CET1 of 5.5%, Tier 1 of 7% and total capital of 9% of risk-weighted assets, plus a 2.5% capital conservation buffer that takes total capital to 11.5%.
- CRAR equals Tier 1 plus Tier 2 capital divided by risk-weighted assets, so a bank with Rs. 9,200 crore of capital and Rs. 80,000 crore of risk-weighted assets has a CRAR of 11.5%.
- In the RBI's 2025 list of Domestic Systemically Important Banks, SBI carries an additional CET1 surcharge of 0.80%, HDFC Bank 0.40% and ICICI Bank 0.20%.
- The RBI requires a minimum leverage ratio of 4% for D-SIBs and 3.5% for other banks, effective October 1, 2019.
- Under the RBI's revised Prompt Corrective Action framework, effective January 1, 2022, a CRAR below 10.25% but at least 7.75%, or a net NPA ratio of 6% to below 9%, breaches Risk Threshold 1.
15.4 Basel III Capital Framework, Prompt Corrective Action & D-SIBs
Exam Focus: Capital-adequacy terms—CRAR, CET1, capital conservation buffer, D-SIBs and PCA—appear regularly in banking-awareness questions because they explain why banks can or cannot lend, pay dividends or expand. This section gives the RBI's figures and a worked CRAR calculation.
1. Why Banks Need Capital
Capital absorbs losses before depositors are hurt. Regulators therefore require banks to hold capital in proportion to the riskiness of their assets, measured as Risk-Weighted Assets (RWAs): a government bond carries a low risk weight, while an unsecured corporate loan carries a higher one.
CRAR (Capital to Risk-weighted Assets Ratio) is also called the Capital Adequacy Ratio (CAR).
2. The Basel Accords
| Accord | Year | Main contribution |
|---|---|---|
| Basel I | 1988 | Minimum capital of 8% of risk-weighted assets, focused on credit risk |
| Basel II | 2004 | Three pillars—minimum capital, supervisory review and market discipline—and a charge for operational risk |
| Basel III | 2010, after the 2008 global financial crisis | Higher-quality capital, capital buffers, a leverage ratio and liquidity standards |
The accords are issued by the Basel Committee on Banking Supervision (BCBS), hosted by the Bank for International Settlements in Basel, Switzerland.
3. Components of Capital
| Tier | What it includes | Role |
|---|---|---|
| Common Equity Tier 1 (CET1) | Paid-up equity capital, share premium, statutory and other disclosed free reserves, retained earnings | Absorbs losses first while the bank is a going concern |
| Additional Tier 1 (AT1) | Perpetual debt instruments and perpetual non-cumulative preference shares that meet Basel III conditions | Going-concern capital that can be written down or converted |
| Tier 2 | Subordinated debt, certain preference shares, and general provisions within limits | Gone-concern capital that protects depositors in a failure |
Tier 1 capital = CET1 + AT1. Total capital = Tier 1 + Tier 2.
4. RBI's Minimum Capital Requirements (Basel III)
| Requirement | % of risk-weighted assets |
|---|---|
| Minimum CET1 | 5.5 |
| Capital Conservation Buffer (CCB), held in CET1 | 2.5 |
| CET1 including CCB | 8.0 |
| Minimum Tier 1 capital | 7.0 |
| Minimum total capital (CRAR) | 9.0 |
| Total capital including CCB | 11.5 |
These are stricter than the global Basel III minimums of 4.5% CET1, 6% Tier 1 and 8% total capital. A bank whose capital dips into the conservation buffer faces restrictions on distributing earnings, such as dividends.
5. Worked Example: Is the Bank Adequately Capitalised?
A bank has risk-weighted assets of Rs. 80,000 crore, CET1 of Rs. 6,800 crore, AT1 of Rs. 400 crore and Tier 2 capital of Rs. 2,000 crore.
- CET1 ratio = 6,800 ÷ 80,000 = 8.5%, which meets the 8.0% requirement including the CCB.
- Tier 1 ratio = (6,800 + 400) ÷ 80,000 = 9.0%, which meets the 7.0% minimum.
- CRAR = (7,200 + 2,000) ÷ 80,000 = 11.5%, exactly the 11.5% requirement including the CCB.
- Verdict: Every requirement is met, but with no margin on total capital, so further growth in risk-weighted assets would need fresh capital.
6. Leverage and Liquidity Standards
| Standard | What it measures | Requirement in India |
|---|---|---|
| Leverage Ratio | Tier 1 capital ÷ total exposure (not risk-weighted) | At least 4% for D-SIBs and 3.5% for other banks, from October 1, 2019 |
| Liquidity Coverage Ratio (LCR) | High-quality liquid assets ÷ net cash outflows over a 30-day stress period | At least 100% |
| Net Stable Funding Ratio (NSFR) | Available stable funding ÷ required stable funding over one year | At least 100% |
7. Domestic Systemically Important Banks (D-SIBs)
Banks whose failure would disrupt the whole financial system—"too big to fail"—are designated D-SIBs under the RBI's framework of July 22, 2014 and must hold additional CET1 capital.
| Bank (2025 list) | Bucket | Additional CET1 (% of RWAs) |
|---|---|---|
| State Bank of India | 4 | 0.80% |
| HDFC Bank | 2 | 0.40% |
| ICICI Bank | 1 | 0.20% |
The higher surcharges for SBI and HDFC Bank apply from April 1, 2025. The D-SIB surcharge is held in addition to the capital conservation buffer.
8. Prompt Corrective Action (PCA) Framework
The RBI's revised PCA framework for scheduled commercial banks (excluding Small Finance Banks, Payments Banks and Regional Rural Banks), effective January 1, 2022, tracks three areas: capital (CRAR and CET1 ratio), asset quality (net NPA ratio) and leverage (Tier 1 leverage ratio). Breaching a risk threshold triggers graded restrictions and corrective actions.
| Indicator | Risk Threshold 1 | Risk Threshold 2 | Risk Threshold 3 |
|---|---|---|---|
| CRAR | Below 10.25% but at least 7.75% | Below 7.75% but at least 6.25% | Below 6.25% |
| Net NPA ratio | 6% or more but below 9% | 9% or more but below 12% | 12% or more |
Restrictions escalate with the threshold and can include curbs on dividend distribution, branch expansion and capital expenditure, along with requirements for capital infusion.
Common Traps
- CRAR uses risk-weighted assets, while the leverage ratio uses unweighted exposure.
- The capital conservation buffer must be met with CET1, not with Tier 2 capital.
- A D-SIB surcharge is extra CET1 on top of the conservation buffer, not a substitute for it.
- 9% is the minimum CRAR; 11.5% is the figure including the conservation buffer.
Under the RBI's Basel III capital regulations, what minimum total capital, including the capital conservation buffer, must a bank maintain as a percentage of risk-weighted assets?
In the RBI's 2025 list of Domestic Systemically Important Banks, which bank carries the highest additional CET1 requirement?
A bank has risk-weighted assets of Rs. 50,000 crore, CET1 capital of Rs. 4,500 crore, Additional Tier 1 capital of Rs. 500 crore and Tier 2 capital of Rs. 1,000 crore. What is its CRAR?