RBI issues draft rules for minimum capital requirements under Basel III

The Reserve Bank of India (RBI) has published draft guidelines for minimum capital requirements for market risk under the Basel III framework. These guidelines propose to set out the instruments to be included in the trading book, which are subject to market risk capital requirements, and the banking book, which is subject to credit risk capital requirements.

In order to converge the RBI's rules with BASEL III norms, the RBI's guidelines will apply to all commercial banks, excluding local area banks, payments banks, regional rural banks and small finance banks. They will come into effect from April 1, 2024.

These guidelines are not applicable to cooperative banks (i.e., urban co-operative banks, state co-operative banks and central co-operative banks).

The comments on the draft guidelines from all stakeholders can be sent by email, with the subject line “Comments on Draft Guidelines on Minimum Capital Requirements for Market Risk” by April 15, 2023, the RBI said.

The guidelines mainly talk about boundaries between the banking book and the trading book, including the scope of the trading book, restrictions on shifting instruments between the regulatory texts, and the treatment of internal risk transfers.

It also talks about definitions and applications of market risk and calculating risk-weighted assets for market risk. In setting up banking and the trading book boundary, the guidelines mention a trading book will consist of all instruments that meet the specifications for trading book instruments like financial instruments and foreign exchange.

“A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset, or an equity instrument. A financial liability is a contractual obligation to deliver cash or another financial asset.”

Banks will also only include a financial instrument or instruments on FX (forex) in the trading book when there is no legal impediment against selling or fully hedging it. They will fair value daily any trading book instrument.

For standards for assigning instruments to the regulatory books, the RBI says any instrument a bank holds for short-term resale; profiting from short-term price movements; locking in arbitrage profits; or hedging risks that arise from instruments be designated as a “trading book instrument”.

Separately, to put a stop to illegal methods being adopted by recovery agents against loan defaults, the RBI, in its latest digital lending guidelines, has said digital lenders must convey the name and other details of empanelled recovery agents authorised to contact the borrower in case of loan default.

If the loan turns delinquent, and the recovery agent has been assigned to the borrower, the particulars authorised agents must be communicated to the borrower "through email/SMS before the recovery agent contacts the borrower for recovery", the RBI said. It says in the case of delinquent loans, recovery or servicing of digital loans can be undertaken by a recovery agent, collecting cash from borrowers.

On the requirement of direct repayment of the loan in the RE’s bank account, the RBI guidelines say the authorised agents can deploy a physical interface to recover loans in cash, where "absolutely necessary".