RBI Scraps NPA Provision Hurdle: Banks Gain Easier Access to Profits for CRAR Calculation

RBI Scraps NPA Provision Hurdle: Banks Gain Easier Access to Profits for CRAR Calculation​

The Reserve Bank of India (RBI) has issued critical Amendment Directions streamlining how banks calculate their Common Equity Tier 1 (CET1) capital. The regulatory changes significantly ease prior restrictions, allowing banks to more reliably include quarterly profits when computing the Capital to Risk weighted Assets Ratio (CRAR).

The updated guidelines represent a substantial shift in prudential norms, making capital adequacy computation less susceptible to volatile provisions for non-performing assets (NPAs). This move is expected to provide immediate clarity and stability across the banking sector.

RBI Finalizes Amendments to Capital Adequacy Norms​

On May 8, 2026, the RBI released three comprehensive Amendment Directions. These directions cover core banking functions, specifically targeting the calculation of CET1 capital.

The amendments impact three key segments of the financial industry. They mandate changes for Commercial Banks, Small Finance Banks (SFBs), and Payments Banks. The directions include the (i) Reserve Bank of India (Commercial Banks - Prudential Norms on Capital Adequacy) Fifth Amendment Directions, 2026, among other crucial regulatory updates.

Key Regulatory Relief on Quarterly Profit Inclusion​

The central theme of the amendments is the review of guidelines concerning the inclusion of quarterly profits into the CET1 capital base for CRAR calculation. Historically, banks faced a major qualifying condition related to NPAs.

Previously, Commercial Banks could reckon profits for CRAR on a quarterly basis. However, this required the incremental provisions made for NPAs at the end of any quarter of the previous financial year not to deviate more than 25 per cent from the average of all four quarters.

The finalized Amendment Directions effectively remove this stringent qualifying condition. By eliminating the 25 per cent deviation test, the RBI significantly de-risks the process of using quarterly profits for capital computation.

Scope of Amendment Directions for Banking Segments​

The updated directions ensure that the eased prudential norms are applied across diverse financial entities.

For Commercial Banks (excluding Local Area Banks and Regional Rural Banks), the relaxation allows for a more straightforward inclusion of current year profits. The amendments strengthen capital inclusion by removing the mandatory stability criteria related to NPA provisioning.

Furthermore, the measures extend to Small Finance Banks and Payments Banks. This comprehensive application ensures that regulatory relief supports capital stability across the entire spectrum of supervised institutions.

The RBI stated that these final directions were formulated after thoroughly examining and considering the extensive feedback received from various stakeholders on the initial draft amendments, aiming to create a pragmatic and supportive regulatory framework.