A bank lends mostly with other people's money. For every ₹100 of assets, an Indian bank typically funds only a small slice with its own capital, and the rest comes from depositors and creditors. If loans go bad, the losses fall first on that slice of capital. If the capital runs out, the losses fall on depositors. Capital adequacy rules decide how thick that slice must be. Since 1988 the world has set them through a series of accords drafted in Basel, Switzerland. This part explains where those accords came from and what the three pillars mean. It covers the kinds of capital a bank can count, how risk-weighted assets are calculated, and what changes on 1 April 2027 when India's revised Basel III rules take effect. It works through a full CRAR calculation, tells the story of the Yes Bank AT1 bonds, which reached its legal end in the Supreme Court this month, and sets out how much capital Indian banks hold today.
Part 18, RBI regulation of banks and NBFCs, gives the headline Basel III numbers in one table and chart. Part 15, the RBI and financial stability, covers the countercyclical buffer, the D-SIB surcharges and the PCA framework. Liquidity rules (LCR and NSFR) have their own part, LCR and NSFR. This part goes underneath those numbers: what the ratios are made of, and how to calculate them.
In the news
- 23 Oct 2026: date set for the new operational risk rules. The RBI issued a second amendment to its "Forthcoming Instructions" Directions of 28 November 2025. It set the implementation date for the Basel III Standardised Approach to operational risk and mapped the Business Indicator to banks' financial statements. It also confirmed that the revised Basel III framework applies to commercial banks, other than small finance banks, payments banks and RRBs, from 1 April 2027. Why it matters for the exam: 1 April 2027 is the start date for the new credit and operational risk rules, and for ECL provisioning.
- 15 Oct 2026: Supreme Court upholds the quashing of Yes Bank's AT1 write-off. The Court dismissed appeals by Yes Bank, the RBI and the Union government against the Bombay High Court's 2023 ruling. The write-off of ₹8,415 crore of AT1 bonds in March 2020 was therefore not valid. Yes Bank estimates that putting the bonds back on its books will cut its CET1 ratio by about 2.4 percentage points, to around 11.4%. Why it matters for the exam: it is the leading Indian case on how AT1 bonds absorb losses, and on the limits of a regulator's powers in a rescue.
- 30 Jun 2026: Financial Stability Report. Scheduled commercial banks had a CRAR of 17.7% and a CET1 ratio of 15.3% at end-March 2026, both multi-decadal highs. Their Tier 1 leverage ratio was 8.2%. In the stress test, the CET1 ratio of 46 major banks would fall from 15.2% to 13.9% by March 2028 in the baseline and to 11.4% in the worst adverse scenario. Every bank would still meet the 5.5% CET1 minimum. Why it matters for the exam: the CRAR, CET1 and stress-test numbers from the latest FSR are asked every year.
- 18 May 2026: countercyclical buffer not switched on. The RBI reviewed its indicators, mainly the credit-to-GDP gap, and decided that activating the countercyclical capital buffer (CCyB) was not needed. Why it matters for the exam: the CCyB has existed since 2015 and still stands at zero.
- 27 Apr 2026: final rules for credit risk. The RBI issued the Reserve Bank of India (Commercial Banks – Capital Charge for Credit Risk – Standardised Approach) Directions, 2026, effective 1 April 2027. They bring more granular risk weights, ratings-based weights for exposures to banks, lower weights for many unrated MSMEs, and a 150% weight for large unrated borrowers. Why it matters for the exam: this is the biggest change to how Indian banks calculate risk-weighted assets since Basel II.
- 2 Dec 2025: D-SIB list for 2025. SBI stayed in bucket 4 (extra CET1 of 0.80%), HDFC Bank in bucket 2 (0.40%) and ICICI Bank in bucket 1 (0.20%). Why it matters for the exam: the surcharges sit on top of the Basel III minimums and the conservation buffer.
- 28 Nov 2025: operational risk rules in the "Forthcoming Instructions". As part of its consolidation of regulations, the RBI put the new standardised approach for operational risk into a Directions chapter. The start date was left to be announced; it was set in October 2026. Why it matters for the exam: the old Basic Indicator Approach, which takes 15% of gross income, is on its way out.
- 7 Oct 2025: draft credit risk rules. The RBI released the draft standardised approach directions for comment, a week after the Governor's statement of 1 October 2025 that the revised Basel III framework would apply from 1 April 2027. Why it matters for the exam: draft first and final rules later is the RBI's usual pattern.
Why banks must hold capital
Capital is the part of a bank's funding that does not have to be repaid: shareholders' money plus profits kept in the business. It does two jobs. It absorbs losses while the bank keeps running, and it gives the owners skin in the game, so that they have something to lose from reckless lending.
The arithmetic shows why the slice must be thick enough. Suppose a bank has assets of ₹1,000 crore, funded by ₹950 crore of deposits and ₹50 crore of equity. If 5% of its loans (₹50 crore) are lost, the equity is wiped out. If the loss is ₹60 crore, depositors are ₹10 crore short. The same bank with ₹100 crore of equity survives both. Higher capital makes a bank safer, but it is also expensive, because shareholders expect a higher return than depositors. Capital rules are a trade-off between safety and the cost of credit. How banks earn the returns that build capital is covered in bank business models and NIM, and what happens when capital runs out in why banks fail.
A simple ratio of equity to assets treats a government bond and an unsecured personal loan as equally risky. The Basel approach instead divides capital by risk-weighted assets (RWAs), in which each asset is counted at a percentage of its value that reflects its risk. The result is the capital to risk-weighted assets ratio (CRAR), also called the capital adequacy ratio:
CRAR = (Tier 1 capital + Tier 2 capital) ÷ risk-weighted assets × 100
The Basel Committee and its accords
The BCBS
The Basel Committee on Banking Supervision (BCBS) was set up at the end of 1974 by the central bank governors of the G10 countries, after disturbances in currency and banking markets, above all the failure of Bankhaus Herstatt in West Germany. It first met in February 1975. It is hosted by the Bank for International Settlements (BIS) in Basel. It has grown from the G10 to 45 member institutions from 28 jurisdictions, including the RBI, and is chaired by Erik Thedéen. Its standards have no legal force of their own. Each member puts them into its own law or regulations, which is why India's rules differ from the Basel text in places.
Basel I (1988)
The Basel Capital Accord of July 1988 set a minimum ratio of capital to risk-weighted assets of 8%, to be met by the end of 1992. It covered only credit risk and used a few broad buckets of risk weights, so a loan to a giant company and one to a struggling firm were weighted the same. The Market Risk Amendment of January 1996, effective at the end of 1997, added a capital charge for market risk and allowed banks to use their own value-at-risk models for it.
Basel II (2004)
The revised framework of June 2004 aimed to make capital more sensitive to risk. It brought in the three pillars (below), let risk weights depend on credit ratings or, for advanced banks, on their own internal models (the internal ratings-based or IRB approach), and added a capital charge for operational risk, the risk of loss from failed processes, people, systems or outside events such as fraud.
Basel III (2010) and the final reforms (2017)
The global financial crisis of 2008 showed that banks which met Basel II on paper held too little capital, and too little of it could actually absorb losses. Much of their "capital" was hybrid debt. The Basel III texts of December 2010, following the agreement of the Group of Governors and Heads of Supervision in September 2010, responded with:
- More and better capital: a new core layer, Common Equity Tier 1 (CET1), at a minimum of 4.5% of RWAs, with strict deductions.
- Buffers: a capital conservation buffer of 2.5% and a countercyclical buffer of up to 2.5%, both in CET1.
- A leverage ratio: a simple backstop that does not depend on risk weights.
- Liquidity standards: the Liquidity Coverage Ratio and the Net Stable Funding Ratio, explained in LCR and NSFR.
- Extra capital for systemically important banks (the G-SIB and D-SIB frameworks).
Most of these were phased in between 2013 and 2019. On 7 December 2017 the BCBS completed Basel III with a package that markets often call "Basel IV", and that US regulators call the "Basel III endgame". It revised the standardised approach for credit risk, limited the use of internal models, replaced all the old operational risk methods with a single new standardised approach, and added an output floor. Under the floor, RWAs from internal models cannot be less than 72.5% of what the standardised approaches would give. Implementation was to start on 1 January 2022. In March 2020, because of COVID-19, the start was pushed back a year to 1 January 2023, with the output floor phasing in to 1 January 2028.
How India adopted each round
- 1992: following the report of the Narasimham Committee (November 1991), the RBI brought in income recognition, asset classification, provisioning and capital adequacy norms from April 1992, to be fully met by 1996.
- Basel II: the RBI decided in 2007 that commercial banks would use the standardised approach for credit risk and the Basic Indicator Approach for operational risk. Foreign banks and Indian banks with operations abroad moved first, from 31 March 2008, and the other commercial banks (excluding local area banks and RRBs) from 31 March 2009.
- Basel III: implemented from 1 April 2013 in phases. The last tranche of the capital conservation buffer, deferred during the pandemic, took effect on 1 October 2021.
- Revised Basel III: the new standardised approaches for credit and operational risk apply from 1 April 2027. The RBI has chosen to keep Indian banks on the standardised approach for credit risk and has not allowed internal models.
The three pillars
- Pillar 1: minimum capital requirements. A formula-based minimum against three risks: credit, market and operational. This is where the 9% CRAR, the CET1 and Tier 1 floors, the buffers and the leverage ratio sit.
- Pillar 2: supervisory review. Each bank must run an Internal Capital Adequacy Assessment Process (ICAAP), a board-approved assessment of all its risks and the capital it needs over the next year. The RBI reviews it through its Supervisory Review and Evaluation Process (SREP). Pillar 2 catches risks that Pillar 1 ignores or understates, such as credit concentration, interest rate risk in the banking book (IRRBB), liquidity, strategic and reputational risk. The supervisor can ask for capital above the Pillar 1 minimum.
- Pillar 3: market discipline. Banks must publish standard tables on their capital, RWAs, risk exposures, leverage and liquidity, so that investors, rating agencies and large depositors can judge their safety and price it.
The pillars reinforce each other. Pillar 1 sets the floor, Pillar 2 adjusts it for each bank, and Pillar 3 lets the market police both.
What counts as capital
Basel III divides regulatory capital into going-concern capital, which absorbs losses while the bank keeps operating (Tier 1), and gone-concern capital, which protects depositors only in liquidation (Tier 2).
Common Equity Tier 1 (CET1)
The highest quality: paid-up equity shares, share premium, statutory and capital reserves, and retained earnings. Before counting it, a bank must make regulatory deductions: goodwill and other intangibles, most deferred tax assets, investments in its own shares, and certain holdings of other financial institutions' capital. In March 2026 CET1 made up 86% of Indian banks' total capital, according to the FSR.
Additional Tier 1 (AT1)
Mainly perpetual debt instruments (PDIs), popularly called AT1 bonds, and perpetual non-cumulative preference shares. To count as AT1 an instrument must:
- be perpetual, with no maturity date and no step-up in the coupon;
- allow the bank to cancel coupons at its discretion, without the missed coupons building up (non-cumulative);
- be callable only after at least five years, and only with the RBI's prior approval;
- be written down or converted into equity if CET1 falls to a pre-specified trigger of 6.125% of RWAs (for issues from 31 March 2019; older issues had a trigger of 5.5% until then); and
- absorb losses at the point of non-viability (PONV), when the RBI decides that the bank would fail without a write-off or a public capital injection.
The RBI's rules also state that CET1 need not be written down before an AT1 instrument is. That clause became central to the Yes Bank dispute.
Tier 2
Mainly subordinated debt with a minimum original maturity of five years, which loses recognition as capital by 20% a year in its last five years, plus general provisions and loss reserves up to 1.25% of credit RWAs, and some revaluation reserves at a discount. Tier 2 must also absorb losses at the point of non-viability.
The requirement in India
India's minimums are stricter than Basel's:
| Ratio, % of RWAs | India | Basel III |
|---|---|---|
| CET1 | 5.5 | 4.5 |
| Tier 1 (CET1 + AT1) | 7.0 | 6.0 |
| Total capital (CRAR) | 9.0 | 8.0 |
| Capital conservation buffer, in CET1 | 2.5 | 2.5 |
| CET1 + CCB | 8.0 | 7.0 |
| CRAR + CCB | 11.5 | 10.5 |
On top come the D-SIB surcharge (0.20% for ICICI Bank, 0.40% for HDFC Bank, 0.80% for SBI) and the CCyB (0 to 2.5%, currently zero). So SBI's effective CET1 floor is 5.5 + 2.5 + 0.8 = 8.8%. Part 18 draws this stack as a chart, comparing India with the Basel minimum. Here the stack is shown for an example bank:
The conservation buffer: what happens when a bank dips into it
The CCB is not a hard minimum. A bank may use it in a period of stress, but as its CET1 ratio falls into the buffer it must keep a rising share of its earnings, and cut dividends, share buybacks and bonuses:
| CET1 ratio | Share of earnings the bank must retain |
|---|---|
| 5.5% to 6.125% | 100% |
| above 6.125% to 6.75% | 80% |
| above 6.75% to 7.375% | 60% |
| above 7.375% to 8.0% | 40% |
| above 8.0% | 0% |
The bands are quarters of the 2.5% buffer, each 0.625 percentage points wide. A bank below 8% also falls into Prompt Corrective Action if it is more than a small margin short; the PCA thresholds are in Part 15.
The leverage ratio
Risk weights can be wrong, as the low weights on AAA-rated mortgage securities were before 2008. The leverage ratio is a backstop that ignores them:
Leverage ratio = Tier 1 capital ÷ exposure measure (on-balance-sheet assets plus derivatives, securities financing and off-balance-sheet items)
Under the RBI's circular of 28 June 2019, the minimum is 4% for D-SIBs and 3.5% for other banks. Banks disclose it every quarter but must meet it at all times. Indian banks' leverage ratio was 8.2% in March 2026.
Risk-weighted assets
RWAs are the denominator of every capital ratio, so how they are calculated matters as much as how much capital a bank has. They have three parts. In India credit risk makes up nearly 86% of the total.
Credit risk
Under the standardised approach each exposure is multiplied by a risk weight set by the RBI, which depends on the type of borrower, its external credit rating, collateral and, for home loans, the loan-to-value (LTV) ratio. Off-balance-sheet items such as guarantees and undrawn credit lines are first converted into an on-balance-sheet equivalent using a credit conversion factor (CCF).
Some weights under today's rules:
- Claims on the central government and the RBI: 0%. Under Basel III every rupee of G-secs adds nothing to credit RWAs, which is one reason SLR holdings are cheap in capital terms.
- Corporates by rating: AAA 20%, AA 30%, A 50%, BBB 100%, BB and below 150%, unrated 100%. Unrated borrowers with total bank borrowing above ₹200 crore get 150%.
- Individual housing loans: 35% to 50%, depending on the loan size and LTV.
- Regulatory retail (small, diversified loans to individuals and small businesses): 75%.
- Consumer credit, such as personal loans: 125%, and credit card receivables 150%, after the RBI raised both by 25 percentage points on 16 November 2023 to cool unsecured lending.
The revised standardised approach from 1 April 2027
The Credit Risk Standardised Approach Directions of 27 April 2026 apply to commercial banks other than small finance banks, payments banks and local area banks. In the FSR's summary, they bring:
- more granular, risk-sensitive weights;
- external ratings-based weights for exposures to banks, replacing the old method based on the counterparty bank's CET1 ratio;
- lower weights for more unrated MSMEs;
- "transactors" (cardholders who repaid in full every month for the past 12 months) in the 75% regulatory retail category;
- realigned credit conversion factors for off-balance-sheet items;
- the same weights for domestic and foreign corporates;
- a specific treatment for equity investments in funds; and
- adjustments to corporate risk weights according to the observed default rates of each rating agency's ratings, so that a lenient rating agency no longer earns its clients lower weights.
| Exposure | Today | From 1 April 2027 |
|---|---|---|
| Corporate rated AA | 30% | 20% |
| Corporate rated BBB | 100% | 75% |
| Unrated corporate with large bank borrowing | 150% above ₹200 crore | 150% above ₹500 crore |
| Unrated MSME, regulatory retail-type | 75% | 75% (other unrated MSMEs 85%) |
| Home loan (first two loans, LTV 60–80%) | 35% | 30% |
| Credit card, not a transactor | 150% | 125% |
| Credit card, transactor | 150% | 75% |
| Personal loans | 125% | 125% |
Home-loan weights from 2027 depend on the LTV: 20% up to 50% LTV, 25% for 50–60%, 30% for 60–80% and 40% for 80–90%. They are 5 percentage points higher for loans of ₹3 crore or more, and higher still from a borrower's third housing loan. A 150% weight applies if a project misses its construction timelines. Defaulted exposures are weighted at 150%, 100% or 50% depending on how much has been provided for. Listed equity carries 250% and speculative unlisted equity 400%.
Market risk
Market risk is the risk of loss on the trading book (and on foreign exchange and gold positions) from movements in interest rates, equity prices and exchange rates. The bank works out a capital charge for each risk and converts it into RWAs by multiplying by 12.5, the reciprocal of 8%. The Basel Committee's new market risk standard (the Fundamental Review of the Trading Book) had not been finalised for Indian banks as of mid-2026.
Operational risk
Today most Indian banks use the Basic Indicator Approach: a capital charge equal to 15% of the average positive annual gross income (net interest income plus net non-interest income) of the previous three years, multiplied by 12.5 to give RWAs. The new standardised approach replaces gross income with a Business Indicator, built from interest, services and financial components, which is multiplied by coefficients that rise with the bank's size. The RBI issued it in June 2023, put it into the Directions of 28 November 2025 and set its start date in the amendment of 23 October 2026.
Worked example: calculating CRAR
Take an illustrative bank with the following credit exposures (₹ crore), using the risk weights that apply from 1 April 2027.
Step 1: credit RWAs.
| Exposure | Amount | Risk weight | RWA |
|---|---|---|---|
| G-secs and cash with the RBI | 35,000 | 0% | 0 |
| Home loans, LTV 60–80% | 20,000 | 30% | 6,000 |
| Corporates rated AAA/AA | 15,000 | 20% | 3,000 |
| Corporates rated BBB | 10,000 | 75% | 7,500 |
| Small MSMEs (regulatory retail) | 8,000 | 75% | 6,000 |
| Personal loans | 6,000 | 125% | 7,500 |
| Total | 94,000 | 30,000 |
The average risk weight is 30,000 ÷ 94,000 = 31.9%.
Step 2: market and operational RWAs. The market risk capital charge is ₹240 crore, so market RWAs = 240 × 12.5 = ₹3,000 crore. The operational risk charge is ₹560 crore, so operational RWAs = 560 × 12.5 = ₹7,000 crore.
Step 3: total RWAs = 30,000 + 3,000 + 7,000 = ₹40,000 crore.
Step 4: ratios. The bank has CET1 of ₹4,800 crore, AT1 of ₹600 crore and Tier 2 of ₹1,000 crore.
- CET1 ratio = 4,800 ÷ 40,000 = 12.0% (minimum with CCB: 8%)
- Tier 1 ratio = (4,800 + 600) ÷ 40,000 = 5,400 ÷ 40,000 = 13.5% (minimum: 7%)
- CRAR = (5,400 + 1,000) ÷ 40,000 = 6,400 ÷ 40,000 = 16.0% (minimum with CCB: 11.5%)
The bank needs 11.5% × 40,000 = ₹4,600 crore, so it has ₹1,800 crore of headroom.
Step 5: leverage. If its total exposure measure, on and off balance sheet, is ₹1,00,000 crore, its leverage ratio = 5,400 ÷ 1,00,000 = 5.4%, above the 3.5% minimum for a non-D-SIB.
Step 6: a shock. Suppose a fraud and a large corporate default cost the bank ₹2,000 crore, all charged against CET1 (assume RWAs are unchanged). CET1 falls to ₹2,800 crore, a ratio of 2,800 ÷ 40,000 = 7.0%. That is above the 5.5% minimum but inside the conservation buffer, in the band above 6.75% and up to 7.375%. The bank must retain 60% of its earnings and limit dividends. Its CRAR falls to 4,400 ÷ 40,000 = 11.0%, which is 50 bp below the 11.5% indicator, so it is in PCA threshold 1. To get CET1 back to 8% it needs 0.08 × 40,000 = ₹3,200 crore, so ₹400 crore of fresh equity. Alternatively, it could shrink its RWAs to 2,800 ÷ 0.08 = ₹35,000 crore, a cut of ₹5,000 crore.
How much capital does a loan use?
Because the minimum including the CCB is 11.5% of RWAs, each ₹100 crore of new lending uses capital of ₹100 crore × risk weight × 11.5%:
- Personal loans (125%): 100 × 1.25 × 0.115 = ₹14.4 crore
- Home loans at 60–80% LTV from 2027 (30%): 100 × 0.30 × 0.115 = ₹3.45 crore
- Corporate loan rated BBB: ₹11.5 crore today (100%), ₹8.6 crore from 2027 (75%)
This is why the RBI uses risk weights as a policy lever. When it raised the weight on consumer credit from 100% to 125% in November 2023, every ₹100 crore of personal loans needed ₹2.9 crore more capital, which slowed unsecured lending without touching interest rates.
AT1 bonds and the Yes Bank case
AT1 bonds pay higher coupons than ordinary bonds because investors take equity-like risk: the coupon can be cancelled, there is no maturity date, and the principal can disappear if the bank gets into trouble. They suit institutions that understand the risk, not savers looking for a better fixed deposit.
The issue. Yes Bank raised ₹8,415 crore through AT1 bonds: ₹3,000 crore in 2016 and ₹5,415 crore in 2017. Many were sold to individual investors.
The rescue. On 5 March 2020 the government placed Yes Bank under a moratorium and the RBI appointed an administrator. The Yes Bank Reconstruction Scheme was notified on 13 March 2020, with SBI and other lenders putting in equity. On 14 March 2020 the administrator wrote down the AT1 bonds in full. The shareholders were not wiped out: their shares were locked in for three years. Bondholders argued that the order of losses had been reversed, with AT1 holders losing everything while shareholders kept a stake.
The courts. On 20 January 2023 the Bombay High Court quashed the write-off. It held that the final reconstruction scheme did not authorise it, and that the administrator had acted beyond his powers. The Supreme Court stayed that order in March 2023, and on 15 October 2026 it dismissed the appeals of Yes Bank, the RBI and the Union government. It also criticised the bank for selling such high-risk instruments to individual investors.
The consequences. The judgment does not mean ₹8,415 crore must be paid out at once, but the bonds must be restored to the books. Yes Bank estimates that this will reduce its CET1 ratio by about 2.4 percentage points, to around 11.4%, based on its September 2026 position, with Tier 1 at around 13.7%. A coupon due on 18 October 2026 was unpaid, and the bank was reported to be preparing a review petition.
The lessons.
- AT1 bonds are designed to absorb losses. Neither court said otherwise.
- A write-down must follow the instrument's contract and the legal powers used in the rescue. A write-down done outside them can be reversed years later.
- Mis-selling turns a capital instrument into a consumer-protection problem.
Abroad, the Credit Suisse rescue of March 2023 wrote off about CHF 16 billion of AT1 bonds while shareholders received UBS shares, which raised the same question about the order of losses.
Where Indian banks stand
The June 2026 FSR shows Indian banks at their strongest in decades:
- CRAR 17.7% and CET1 15.3% in March 2026, up from 17.4% and 14.8% a year earlier. In March 2018, at the height of the bad-loan crisis, CRAR was only 13.5%.
- The rise came from capital growing faster than RWAs. Credit RWAs grew more slowly than credit in 2025-26 (11.2% against 14.5%) for the first time in three years, a sign that new lending has moved to lower-risk-weight exposures.
- Public sector banks remain the least capitalised group, with CET1 of 13.5% and a leverage ratio of 6.4%. Private and foreign banks have leverage ratios above 10%.
- Stress tests: under the baseline, the CRAR of 46 major banks would fall from 17.5% to 15.6% by March 2028. Under the two adverse scenarios it would fall to 13.3% and 13.0%. No bank would breach the 9% minimum in the baseline, but one and two banks might under the adverse scenarios. All would meet the 5.5% CET1 minimum.
These buffers matter for 2027. Expected credit loss provisioning, which CRISIL estimates will cut CET1 by up to 120 bp, and the revised RWA rules both start on 1 April 2027. The new risk weights cut some charges (rated corporates, MSMEs, low-LTV home loans) and raise others (large unrated borrowers, real estate with weak repayment sources, equity in funds). Banks with a CET1 of 15% can absorb these changes without strain. A bank near the minimum would struggle.
Common exam traps
9% vs 8%. The Basel III minimum CRAR is 8%. India's is 9%. With the CCB, the figures are 10.5% and 11.5%.
CET1 5.5% vs 4.5%. India requires 5.5% CET1 (8% with the CCB); Basel requires 4.5%.
Pillar 2 is not "liquidity". Pillar 2 is supervisory review (ICAAP and SREP). Liquidity standards (LCR and NSFR) are Basel III additions, not a pillar.
Basel II was 2004, not 2008. India implemented it in 2008-09. Basel III was published in 2010 and implemented in India from 1 April 2013.
AT1 is going-concern capital; Tier 2 is gone-concern. AT1 counts in Tier 1.
The leverage ratio uses Tier 1, not total capital, and its denominator is unweighted exposure.
The multiplier is 12.5, not 11.11. Market and operational risk charges are converted into RWAs by multiplying by 12.5 (1 ÷ 8%), even though India's minimum CRAR is 9%.
The 2027 rules do not bring internal models. The RBI is applying only the standardised approach for credit risk.
Key facts at a glance
| BCBS | Set up end-1974 by G10 governors; 45 members from 28 jurisdictions; hosted by the BIS, Basel |
| Basel I | July 1988; 8% of RWAs; credit risk only; market risk added 1996 |
| Basel II | June 2004; three pillars; operational risk added |
| Basel III | December 2010; final reforms 7 December 2017; output floor 72.5% |
| India | Capital norms April 1992; Basel II 2008-09; Basel III from 1 April 2013 |
| Minimums in India | CET1 5.5%, Tier 1 7%, CRAR 9%; CCB 2.5% (fully from 1 October 2021) |
| With CCB | CET1 8%, CRAR 11.5% |
| D-SIB surcharges | SBI 0.80%, HDFC Bank 0.40%, ICICI Bank 0.20% (CET1) |
| CCyB | 0–2.5%; framework of 5 February 2015; not activated (review of 18 May 2026) |
| Leverage ratio | 4% for D-SIBs, 3.5% for other banks |
| AT1 trigger | CET1 of 6.125% of RWAs; also point of non-viability |
| Tier 2 | Minimum maturity 5 years; general provisions up to 1.25% of credit RWAs |
| RWA multiplier | 12.5 for market and operational risk charges |
| Revised credit and operational risk rules | Credit risk directions 27 April 2026; both effective 1 April 2027 |
| Banks, March 2026 | CRAR 17.7%, CET1 15.3%, leverage 8.2% (FSR June 2026) |
| Yes Bank AT1 | ₹8,415 crore written off 14 March 2020; quashed by Bombay HC 20 January 2023; upheld by the Supreme Court 15 October 2026 |
Exam corner: what to remember
- BCBS 1974 (Herstatt) → Basel I 1988 (8%) → Basel II 2004 (three pillars) → Basel III 2010 → final reforms 2017.
- India: CET1 5.5% + AT1 1.5% = Tier 1 7%; + Tier 2 2% = CRAR 9%; + CCB 2.5% = 11.5%.
- Three pillars: minimum capital, supervisory review (ICAAP/SREP), market discipline (disclosure).
- Leverage ratio: Tier 1 ÷ exposure; 4% D-SIBs, 3.5% others.
- RWAs = credit RWAs + 12.5 × (market risk charge + operational risk charge).
- 2027 risk weights: BBB corporates 75%, AAA/AA 20%, regulatory retail 75%, personal loans 125%, unrated borrowers above ₹500 crore 150%, home loans 20–40% by LTV.
- AT1: perpetual, discretionary coupons, call after 5 years, trigger at CET1 6.125%, PONV. Yes Bank: ₹8,415 crore; the SC upheld the quashing on 15 October 2026.
- FSR June 2026: CRAR 17.7%, CET1 15.3%, leverage 8.2%; PSB CET1 13.5%, private 16.8%, foreign 17.2%.
For exam-specific syllabus and pattern details, see our pages for RBI Grade B, SBI PO and IBPS PO.
Test yourself
The minimum Common Equity Tier 1 ratio that the RBI requires of scheduled commercial banks, excluding the conservation buffer, is:
Show answer
Answer: (b) India requires 5.5% CET1, a percentage point above the Basel minimum of 4.5%; with the 2.5% CCB it becomes 8%.
The Basel II framework, which introduced the three pillars, was published by the BCBS in:
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Answer: (c) Basel II was published in June 2004; 1988 was Basel I, 1996 the market risk amendment and 2010 Basel III.
Under the Basel framework, Pillar 2 refers to:
Show answer
Answer: (a) Pillar 2 is the supervisory review process; Pillar 1 is minimum capital and Pillar 3 is market discipline.
A bank has RWAs of ₹50,000 crore, CET1 of ₹4,000 crore, AT1 of ₹750 crore and Tier 2 of ₹1,250 crore. Its CRAR is:
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Answer: (d) (4,000 + 750 + 1,250) ÷ 50,000 = 6,000 ÷ 50,000 = 12.0%; its CET1 ratio is 8.0% and its Tier 1 ratio 9.5%.
A bank's capital charge for operational risk is ₹300 crore. The risk-weighted assets it adds are:
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Answer: (a) Capital charges are converted into RWAs by multiplying by 12.5: 300 × 12.5 = ₹3,750 crore.
On 15 October 2026, the Supreme Court upheld the quashing of the write-off of AT1 bonds worth about ₹8,415 crore issued by:
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Answer: (c) The Yes Bank AT1 bonds were written off on 14 March 2020; the Bombay High Court quashed the write-off in January 2023 and the Supreme Court dismissed the appeals.
According to the RBI's Financial Stability Report of June 2026, the CET1 ratio of scheduled commercial banks in March 2026 was:
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Answer: (b) CET1 was 15.3% and CRAR 17.7%; 13.5% was the CET1 of public sector banks.
Under the RBI's revised standardised approach for credit risk, effective 1 April 2027, a long-term exposure to a corporate rated BBB carries a risk weight of:
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Answer: (d) BBB falls from 100% under the current rules to 75%; AAA and AA get 20% and A gets 50%.
The minimum leverage ratio for domestic systemically important banks in India is:
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Answer: (c) D-SIBs need 4% and other banks 3.5%, under the RBI's circular of 28 June 2019.
For AT1 instruments issued by Indian banks on or after 31 March 2019, the pre-specified trigger for write-down or conversion is a CET1 ratio of:
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Answer: (a) The trigger is CET1 of 6.125% of RWAs; older instruments had a lower trigger of 5.5% before that date.
Further reading
- BIS, History of the Basel Committee: the official account from Herstatt to the 2017 reforms, short and clear.
- BIS, Basel III: Finalising post-crisis reforms (press release, 7 December 2017): what the "Basel IV" package changed, including the output floor.
- RBI, Master Circular – Basel III Capital Regulations (12 May 2023): the full Indian rulebook on capital definitions, risk weights, the CCB and the leverage ratio.
- RBI, Financial Stability Report, June 2026: Chapter II has the capital ratios by bank group and the stress tests; Chapter III summarises the 2027 credit risk rules.
- RBI (Commercial Banks – Capital Charge for Credit Risk – Standardised Approach) Directions, 2026 (reproduced by TaxGuru): the risk-weight tables that apply from April 2027.
- KPMG India, Basel III standardised approach (May 2026): a short practitioner's summary of what changes and what banks must do.
- RBI, Regulatory measures towards consumer credit and bank credit to NBFCs (16 November 2023): a clear example of risk weights used as a policy tool.
Sources
- BIS, History of the Basel Committee: founding at end-1974 after Herstatt; first meeting February 1975; Basel I July 1988 and 8%; Market Risk Amendment January 1996; Basel II June 2004 and three pillars; Basel III September and December 2010; leverage ratio, LCR, NSFR; 45 members from 28 jurisdictions (accessed 24 October 2026)
- BIS, Basel Committee membership: 45 members from 28 jurisdictions; chair Erik Thedéen; secretariat at the BIS (accessed 24 October 2026)
- BIS press release, 7 December 2017: final Basel III reforms; output floor of 72.5%; revised standardised approaches for credit and operational risk; original start date of 1 January 2022 (accessed 24 October 2026)
- BIS press release, 27 March 2020: implementation deferred to 1 January 2023; output floor transition extended to 1 January 2028 (accessed 24 October 2026)
- RBI, Chronology: Crisis and Reforms, 1991 to 2000: Narasimham Committee report of November 1991; prudential and capital adequacy norms from April 1992 (accessed 24 October 2026)
- RBI, Master Circular – Basel III Capital Regulations, 1 July 2015: Basel III from 1 April 2013; minimum ratios table; Basel II adoption (standardised approach, BIA) and ICAAP from 31 March 2008 and 2009; BIA alpha of 15%; 12.5 multiplier; capital conservation table; AT1 features, 6.125% trigger; Tier 2 limits (accessed 24 October 2026)
- RBI, Master Circular – Basel III Capital Regulations, 12 May 2023: current corporate risk weights (AAA 20% to BB and below 150%), the ₹200 crore unrated threshold, housing-loan weights of 35–50%, regulatory retail at 75%, leverage ratio of 4% for D-SIBs and 3.5% for others under the circular of 28 June 2019 (accessed 24 October 2026)
- RBI circular, 16 November 2023: consumer credit risk weight raised from 100% to 125%; bank credit card receivables from 125% to 150% (accessed 24 October 2026)
- RBI, Financial Stability Report, June 2026, Chapter II: CRAR 17.7%, CET1 15.3%, leverage 8.2%; Chart 2.6 bank-group ratios; CET1 86% of capital; credit RWAs 86% of RWAs; stress-test results; Table 2.1 (accessed 24 October 2026)
- RBI, Financial Stability Report, June 2026, Chapter III: summary of the Credit Risk Standardised Approach Directions of 27 April 2026 and their eight main changes; definition of transactors; BCBS output floor phasing (accessed 24 October 2026)
- RBI press release, 27 April 2026 (copy hosted by Ricago): final credit risk directions issued, draft of 7 October 2025, effective 1 April 2027 (accessed 24 October 2026)
- TaxGuru, RBI Credit Risk Standardised Approach Directions, 2026: risk weights for sovereigns, banks, corporates, MSMEs, retail, residential and commercial real estate, defaulted exposures and equity from 1 April 2027 (accessed 24 October 2026)
- KPMG India, May 2026: scope (excluding SFBs, payments banks and LABs); ₹500 crore threshold; operational risk SA issued 26 June 2023; market risk rules still to come (accessed 24 October 2026)
- RBI press release, 23 October 2026: second amendment on operational risk; Forthcoming Instructions Directions of 28 November 2025; Governor's statement of 1 October 2025; scope excluding SFBs, payments banks and RRBs (accessed 24 October 2026)
- RBI press release, 18 May 2026: CCyB not activated (accessed 24 October 2026)
- RBI press release, 2 December 2025: 2025 D-SIB list and surcharges (accessed 24 October 2026)
- The Economic Times, 23 October 2026: Supreme Court ruling of 15 October 2026; tranches of ₹3,000 crore (2016) and ₹5,415 crore (2017); Bombay HC ruling of January 2023; CET1 impact of 2.4 percentage points to about 11.4%; Tier 1 about 13.7%; unpaid coupon of 18 October; review petition; Credit Suisse CHF 16 billion (accessed 24 October 2026)
- Wikipedia, Yes Bank AT1 bond controversy: scheme notified 13 March 2020; write-off on 14 March 2020; Bombay High Court ruling of 20 January 2023 (citing Reuters); Supreme Court stay of March 2023 (accessed 24 October 2026)
- CRISIL Ratings, April 2026: ECL impact of up to 120 bp of CET1 (accessed 24 October 2026)