The Reserve Bank of India (RBI) on Friday said it has not accepted feedback that warned against allowing quarterly profits to be added to the calculation of capital adequacy levels.
It said that under current guidelines, banks are permitted to take quarterly profits to capital, but with an additional qualifying condition pertaining to bad loan provisions.
"The proposed revision to the guidelines removes the additional qualifying condition," it said.
RBI said that banks are required to factor in aspects like probable charges on profits, seasonal variations, etc., as well as compliance with extant guidelines, before taking the quarterly profits to regulatory capital.
"There is also a requirement of audit/limited review, which ensures that the quarterly profits are accrued to regulatory capital after verification and certification."
On 8 April, RBI proposed easing banks' capital requirements by allowing quarterly profits to be added to the calculation of capital adequacy levels.
Industry feedback
According to the regulator, it received feedback on its 8 April proposal that integrating quarterly profits into CET1 (common equity tier one) capital requires careful analysis of profit skewness, seasonal variations, cost-related challenges like depreciation and write-offs, regional differences, volatile asset quality, external shocks from geopolitical or climate factors, among others.
The feedback said that these, along with festive spikes, such as those during Diwali, can create temporary profit surges but are not reflective of structural strength.
"Recognizing these transitory earnings for capital adequacy ratio calculations risks artificially inflating lending capacity, leading to unsustainable credit expansion and potential capital stress when profits normalize in leaner periods," RBI said, quoting the feedback.
RBI governor Sanjay Malhotra said on 8 April that it does not change the calculation of net profit but only alters the capital adequacy calculation. "It is a better reflection of the capital that the banks have," Malhotra had told reporters at the post-policy press conference.