RBI Scraps NPA Provision Limit for Including Quarterly Profits in CET1 Capital
Why it matters
The Reserve Bank of India (RBI) has finalized amendments to its capital adequacy framework, specifically targeting how banks reckon quarterly profits within Common Equity Tier 1 (CET1) capital. Following a consultation period that began in April 2026, the central bank issued three distinct amendment directions covering Commercial, Small Finance, and Payments Banks.
The core change involves the removal of a long-standing hurdle: the qualifying condition related to incremental provisions for Non-Performing Assets (NPAs). Previously, banks were permitted to include current-year quarterly profits in their CRAR calculations only if their incremental NPA provisions did not deviate more than 25 percent from the average of the preceding four quarters. By eliminating this cap, the RBI is simplifying the path for banks to recognize internal capital generation in their regulatory ratios without being penalized for fluctuations in provision amounts.
| Bank Category | 2026 Amendment Direction |
|---|---|
| Commercial Banks | Prudential Norms on Capital Adequacy (5th Amendment) |
| Small Finance Banks | Prudential Norms on Capital Adequacy (4th Amendment) |
| Payments Banks | Prudential Norms on Capital Adequacy (2nd Amendment) |
Glossary
Common Equity Tier 1 (CET1): A bank's highest-quality core capital, primarily comprising equity shares and retained earnings, designed to absorb losses during stress.
CRAR: The Capital to Risk-Weighted Assets Ratio measures a bank's capital strength against its credit, market, and operational risks.
NaukriSync Exam Angle
Indian Economy. Focus on the specific policy shift: the removal of the 25% incremental NPA provision deviation cap for profit inclusion. Expect questions on the types of banks covered by the 2026 Amendment Directions or how this adjustment influences CET1 capital components under Basel III norms.