RBI Scraps NPA Provision Rule for Including Quarterly Profits in CET1 Capital
Why it matters
Following a feedback period initiated in April 2026, the Reserve Bank of India (RBI) has finalized three amendment directions that simplify how banks calculate their Capital to Risk-weighted Assets Ratio (CRAR). Previously, commercial banks could only include current-year quarterly profits in their CET1 capital if their incremental provisions for non-performing assets (NPAs) did not swing more than 25% from the prior year's quarterly average. The regulator has now rescinded this qualifying condition.
By removing this gate, the RBI allows banks to reflect their financial health and capital strength more immediately in their regulatory filings. The change decouples profit inclusion from the volatility of provision requirements, providing a clearer real-time picture of a bank's capital position. These rules are categorized under three separate orders issued by Chief General Manager Brij Raj, covering Commercial, Small Finance, and Payments Banks respectively.
| Direction Title | Applicability |
|---|---|
| Fifth Amendment Directions, 2026 | Commercial Banks |
| Fourth Amendment Directions, 2026 | Small Finance Banks |
| Second Amendment Directions, 2026 | Payments Banks |
Glossary
CET1 Capital: Common Equity Tier 1 capital; the highest quality of regulatory capital, primarily consisting of common stock and retained earnings.
CRAR: Capital to Risk-weighted Assets Ratio; a measure used to ensure banks have enough cushion to handle a reasonable amount of losses before becoming insolvent.
NaukriSync Exam Angle
Indian Economy & Banking. Key fact: The RBI has removed the 25% NPA provision deviation limit for banks wanting to include quarterly profits in CET1 capital as of May 8, 2026. Potential question formats include identifying the specific percentage threshold that was removed or identifying which bank categories (Commercial, SFB, and Payments) are subject to these revised capital adequacy norms.