Reserve Bank of India (RBI) has reviewed the capital requirement position of all Scheduled Commercial Banks including the Public Sector Banks (PSBs) and aligned, to some extent, the current regulations on treatment of certain balance sheet items, for the purpose of regulatory capital, with the guidelines of Basel Committee on Banking Supervision (BCBS), vide circular DBR.No.BP.BC.83/21.06.201/2015-16 dated March 1, 2016 as under:

(i) Treatment of revaluation reserves:- Revaluation reserves arising out of change in the carrying amount of a bank’s property consequent upon its revaluation may, at the discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier 2 capital under extant regulations, subject to meeting some conditions mentioned in above instructions.

(ii)  Treatment of Foreign Currency Translation Reserve (FCTR):- Banks may, at their discretion, reckon foreign currency translation reserve arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital at a discount of 25% subject to meeting some conditions mentioned in above instructions.

(iii)  Treatment of Deferred Tax Assets (DTAs):-

• Deferred Tax Assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1 capital.
• DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction from CET1 capital, be recognised in the CET1 capital up to 10% of a bank’s CET1 capital, at the discretion of banks.

(iv). The amount of DTAs which is not deducted from CET1 capital will be risk weighted at 250% as in the case of significant investments in common shares not deducted from bank’s CET1 capital.

This was stated by Shri Santosh Kumar Gangwar, Minister of State in the Ministry of Finance in written reply to a question in Lok Sabha.

Capital treatment of reserves: selective inclusion of revaluation and translation reserves into CET1 with restricted recognition. Banks may, at their discretion and subject to specified conditions, recognise revaluation reserves and foreign currency translation reserves as Common Equity Tier 1 (CET1) capital after applying prescribed discounts instead of treating them as lower-tier capital. Deferred Tax Assets related to accumulated losses must be fully deducted from CET1, whereas DTAs from timing differences may be recognised in CET1 up to a capped proportion, with any non-deducted portion subject to a high supervisory risk weight comparable to that on significant investments in common shares.