RBI Removes NPA Provision Limit for Including Quarterly Profits in CET1 Capital
Why it matters
On May 8, 2026, the Reserve Bank of India (RBI) issued final amendment directions regarding the inclusion of current-year quarterly profits in Common Equity Tier 1 (CET1) capital for the calculation of the Capital to Risk-weighted Assets Ratio (CRAR). Previously, Commercial Banks (excluding Local Area Banks and Regional Rural Banks) were permitted to include these profits only if incremental provisions for non-performing assets (NPAs) at the end of any of the preceding four quarters did not deviate by more than 25% from the average of those quarters. The new directions remove this specific qualifying condition.
The RBI released three separate amendment directions following a stakeholder feedback process that began with draft versions on April 8, 2026. These are: the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Fifth Amendment Directions, 2026; the Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Fourth Amendment Directions, 2026; and the Reserve Bank of India (Payments Banks – Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026. This change streamlines how banks reckon quarterly gains toward their core capital base.
Glossary
CET1 Capital: Common Equity Tier 1 capital is the highest quality of bank capital, consisting primarily of common shares and retained earnings.
CRAR: Capital to Risk-weighted Assets Ratio is the measurement of a bank's capital expressed as a percentage of its risk-weighted credit exposures.
NPA: A Non-Performing Asset is a classification for loans or advances that are in default or in arrears.
Exam Perspective
Key regulatory change: Removal of the 25% incremental NPA provision deviation limit for CET1 capital inclusion. Entities affected: Commercial Banks (except LABs and RRBs), Small Finance Banks, and Payments Banks. Effective date of final directions: May 8, 2026.