RBI Eases Capital Rules for Banks, Removes NPA Provisioning Condition

Original: RBI eases NPA-linked capital rules, scraps IFR buffer for banks

The Economic Times•Apr 8, 20262 min

In a Nutshell

The Reserve Bank of India has relaxed capital computation norms for banks by removing the NPA-linked condition for including quarterly profits in capital adequacy calculations. Additionally, the central bank proposed to eliminate the Investment Fluctuation Reserve (IFR), reflecting a strengthening banking system and improved asset quality.

Key Points

01RBI has removed the NPA provisioning condition for capital adequacy calculations.
02The Investment Fluctuation Reserve (IFR) requirement will be scrapped.
03Capital adequacy for scheduled commercial banks is at 16.91%, well above regulatory thresholds.
04Gross NPA ratio for banks improved to 1.89% from 2.42% over the past year.
05Non-bank lenders also showed resilience with a CRAR of 25.59%.

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Full Summary

In a significant policy shift, the Reserve Bank of India (RBI) has eased capital computation norms for banks by eliminating the NPA-linked condition that restricted the inclusion of quarterly profits in capital adequacy calculations. RBI Governor Sanjay Malhotra announced these changes during the first bi-monthly policy review for FY27. Previously, banks could only include quarterly profits in their Capital to Risk Weighted Assets Ratio (CRAR) if their incremental provisioning for non-performing assets (NPAs) did not deviate more than 25% from the average of the previous four quarters. This requirement has now been proposed for removal, easing constraints on capital recognition. Furthermore, the RBI plans to scrap the Investment Fluctuation Reserve (IFR), which served as an additional buffer against mark-to-market losses on investments. This decision reflects the evolution of prudential norms and the improved capital charges for market risk. As of December 2025, the capital adequacy of scheduled commercial banks stood at 16.91%, significantly above the regulatory minimum, with the gross NPA ratio declining to 1.89% from 2.42% a year earlier. Non-bank lenders also demonstrated resilience, with a CRAR of 25.59% and a gross NPA ratio of 2.14%, down from 2.52%.

Key Figures

16.91%

Capital adequacy of scheduled commercial banks

1.89%

Gross NPA ratio for banks

25.59%

CRAR for non-bank lenders

2.14%

Gross NPA ratio for non-bank lenders

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Why It Matters

These regulatory changes are expected to enhance the capital position of banks, potentially leading to increased lending capacity and improved financial stability.

Who is affected

bank customers, borrowers, and investors

What to know

Banks may consider leveraging this increased capital flexibility to expand their lending operations.

FAQ

The RBI has removed the NPA provisioning condition for including quarterly profits in capital adequacy calculations and proposed to eliminate the Investment Fluctuation Reserve (IFR).

The gross NPA ratio for banks has improved to 1.89%, down from 2.42% a year earlier.

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