Prudential
Norms on Capital Adequacy –Cross holding of capital among banks/ financial institutions
Please refer to our circular DBOD.No.BP.BC.20/
21.01.002/ 2003-04 dated September 2, 2003 in terms of which a bank's aggregate
investment in Tier II bonds issued by other banks and financial institutions is
permitted up to 10 per cent of the investing bank's capital funds (Tier I plus
Tier II capital). The matter has since been reviewed and it has been decided that
–
- The above ceiling
of 10 per cent would henceforth be applicable to banks' / FIs' investments in
all types of instruments listed at (ii) below, which are issued by other banks
/ FIs and are eligible for capital status for the investee bank / FI.
- Banks'
/ FIs' investment in the following instruments will be included in the prudential
limit of 10 per cent referred to at (i) above.
- Equity shares;
- Preference shares eligible for capital
status;
- Subordinated debt instruments;
- Hybrid debt capital instruments;
and
- Any other instrument approved as in the nature of capital.
- Banks
/ FIs should not acquire any fresh stake in a bank's equity shares, if by such
acquisition, the investing bank's / FI's holding exceeds 5 per cent of the investee
bank's equity capital.
2. Banks’
/ FIs’ investments in the equity capital of subsidiaries are at present deducted
from their Tier I capital for capital adequacy purposes. Investments in the instruments
issued by banks / FIs which are listed at paragraph 1(ii) above, which are not
deducted from Tier I capital of the investing bank/ FI, will attract 100 per cent
risk weight for credit risk for capital adequacy purposes.
3.
Banks/ FIs which currently exceed the limits specified at (i) and (iii) of paragraph
1 above, may apply to the Reserve Bank within 45 days from the date of this circular
along with a definite roadmap for reduction of the exposure within prudential
limits.
Yours
faithfully,
(C.R. Muralidharan)
Chief
General Manager-in-Charge