Banking News

Amendments to capital treatment of Banks’ Balance Sheet items


The extant regulations with regard to the regulatory capital of banks in India are different from internationally adopted Basel III capital standards. With a view to bringing the Banks’ Balance Sheet Items in closer Alignment with Basel Framework, RBI has reviewed the position and  made some amendments to the capital adequacy guidelines for the purposes of determining banks’ regulatory capital. The salient features of the amendments are herein below;
1.Treatment of revaluation reserves:
At the discretion of banks, upon revaluation of banks property, change in the carrying amount of bank’s property would be considered as tier-1 capital at a discount of 55% instead of Tier-2 capital as hitherto. The above treatment is subject to a condition that the revaluation of property should be realistic in accordance with Indian Accounting Standard.
2.Treatment of foreign currency translation reserve (FCTR):
Foreign currency translation reserve arising due to the translation of financial statements of bank’s foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital which is reckoned at a discount of 25%. The above treatment is subject to a condition that the FCTR are shown as ‘Reserves & Surplus’ in the Balance Sheet of the bank under schedule 2;
3.Treatment of deferred tax assets (DTAs):
The DTAs are associated with accumulated losses and other such assets. Such losses should be deducted in full from CET1 capital. However, the DTAs other than accumulated losses due to the timing difference may be recognised in the CET1 capital up to 10% Bank’s CET1 capital instead of the full deduction.
The treatment of items mentioned is subject to the conditions that the external auditors of the bank have not expressed any qualified opinion on them.

The extant regulations with regard to the regulatory capital of banks in India are different from internationally adopted Basel III capital standards. With a view to bringing the Banks’ Balance Sheet Items in closer Alignment with Basel Framework, RBI has reviewed the position made some amendments to the capital adequacy guidelines for the purposes of determining banks’ regulatory capital. The salient features of the amendments are herein below;

1.Treatment of revaluation reserves:
At the discretion of banks, upon revaluation of banks property, change in the carrying amount of bank’s property would be considered as tier-1 capital at a discount of 55% instead of Tier-2 capital as hitherto. The above treatment is subject to a condition that the revaluation of property should be realistic in accordance with Indian Accounting Standard.
2.Treatment of foreign currency translation reserve (FCTR):
Foreign currency translation reserve arising due to the translation of financial statements of bank’s foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital which is reckoned at a discount of 25%. The above treatment is subject to a condition that the FCTR are shown as ‘Reserves & Surplus’ in the Balance Sheet of the bank under schedule 2;
3.Treatment of deferred tax assets (DTAs):
The DTAs are associated with accumulated losses and other such assets. Such losses should be deducted in full from CET1 capital. However, the DTAs other than accumulated losses due to the timing difference may be recognised in the CET1 capital up to 10% Bank’s CET1 capital instead of the full deduction.
The treatment of items mentioned is subject to the conditions that the external auditors of the bank have not expressed any qualified opinion on them.

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