The Reserve Bank of India on May 8, 2026 issued three final Amendment Directions amending the prudential capital adequacy norms for Commercial Banks, Small Finance Banks, and Payments Banks. These amendments remove the earlier qualifying condition — which linked quarterly profit inclusion in CET1 capital to the prior year's NPA provisioning behaviour — and replace it with a clean, formula-driven mechanism effective immediately.
📋 Notification Details at a Glance
| Press Release No. | 2026-2027/227 |
| Date | May 08, 2026 |
| Issued Under | Section 35A, Banking Regulation Act, 1949 |
| Effective From | With Immediate Effect |
| Entities Covered | Commercial Banks (excl. LABs & RRBs), Small Finance Banks, Payments Banks |
| Master Directions Amended | RBI Prudential Norms on Capital Adequacy Directions, 2025 (dated Nov 28, 2025) for all three bank categories |
| Signed By | Sunil T S Nair, Chief General Manager (Directions); Brij Raj, CGM (Press Release) |
| Draft Consultation | April 8, 2026 |
🏛️ Background — Why Were These Amendments Needed?
Under the Basel III capital adequacy framework as implemented by RBI, banks must maintain a minimum Capital to Risk weighted Assets Ratio (CRAR). The highest-quality component — Common Equity Tier 1 (CET1) — forms the cornerstone of a bank's loss-absorbing capacity. Banks naturally prefer to include current-year profits in CET1 as they accrue quarterly, rather than waiting for year-end audit finalisation.
RBI permitted Commercial Banks to reckon quarterly profits for CRAR calculation — but the earlier framework carried a qualifying condition: the incremental provisions made for NPAs at the end of any of the four quarters of the previous financial year could not deviate by more than 25% from the average of the four quarters of that year.
⚠️ The Problem With the Old Condition
The 25% NPA provision deviation test was based on last year's provisioning behaviour — not the current year. A bank whose NPA provisioning was lumpy in the prior year (due to large one-time provisions, regulatory instructions on specific accounts, or resolution of stressed assets) could be barred from reckoning current-year profits in CET1, even if its current financial health was entirely sound. This created an arbitrary and indirect link between prior-year provisioning patterns and current capital adequacy reporting.
On April 8, 2026, the RBI released three Draft Amendment Directions for stakeholder consultation. After examining all feedback received, the final Amendment Directions were released on May 8, 2026 — effective immediately. An Annex summarising stakeholder feedback has also been published alongside the press release.
📋 The Three Amendment Directions
Three separate but substantively identical Amendment Directions were issued — one for each category of bank. The new mechanism is the same across all three; only the paragraph references and amendment serial numbers differ.
🔄 What Changed — Old Provision vs New
The Old Provision (now deleted):
The New Provision (substituted with immediate effect):
A bank may reckon the profits in current financial year for CRAR calculation on a quarterly basis subject to two conditions:
- Condition (a): The financial statements shall be audited or subjected to limited review on a quarterly basis; and
- Condition (b): The amount which can be reckoned shall be arrived at using the following formula:
New Eligible Profit Formula
EPt = NPt − 0.25 × D × t
EPt = Eligible profit up to quarter 't' of the current financial year (t varies from 1 to 4)
NPt = Net profit up to quarter 't' (cumulative)
D = Average dividend paid during the last three financial years
t = Quarter number (1 to 4)
⚠️ The cumulative net loss up to the quarter end shall be fully deducted while calculating CET1 capital for the relevant quarter.
📊 Before vs After — Complete Comparison
| Aspect | 🔴 Before | 🟢 After (May 8, 2026) |
|---|---|---|
| NPA provisioning test | Required — prior year quarterly NPA provisions must not deviate more than 25% from the year's average | Removed entirely — no reference to NPA provisioning patterns |
| Profit cap mechanism | No explicit formula; bank could potentially reckon full net profit after satisfying the NPA condition | Formula-based: EPt = NPt − 0.25 × D × t — deducts pro-rated average dividend from net profit |
| Loss deduction | Implied | Explicitly stated — cumulative net loss fully deducted from CET1 for the quarter |
| Bank categories covered | Commercial Banks only (LABs & RRBs excluded) | Commercial Banks, Small Finance Banks, and Payments Banks — all three simultaneously |
| Certainty for banks | Low — could fail the test due to prior-year provisioning decisions beyond current control | High — deterministic formula, calculable in advance for every quarter |
| Link to prior year | Yes — triggered by prior year NPA provisioning patterns | None — entirely current-year focused; uses 3-year average dividend only |
💡 How the Formula Works — Practical Example
Worked Illustration
Suppose a bank has paid an average dividend of ₹200 crore over the last three financial years (D = ₹200 crore). At the end of Q2 (t = 2), the bank's cumulative net profit is ₹650 crore (NP₂ = ₹650 crore), and its Q2 financial statements have been subjected to limited review.
Eligible Profit (EP₂) = 650 − (0.25 × 200 × 2) = 650 − 100 = ₹550 crore
The bank may reckon ₹550 crore in its CET1 capital for CRAR computation at Q2 — regardless of how its NPA provisioning was distributed in the prior year. The formula deducts a pro-rated portion of the expected annual dividend, ensuring profits earmarked for distribution to shareholders are not counted as regulatory capital.
🎯 Why This Matters — Key Implications
1. Greater Certainty in Capital Planning
The formula-based approach gives treasury and capital teams a deterministic tool. At the start of any quarter, a bank can calculate exactly how much of its year-to-date net profit — net of a pro-rated dividend provision — it can include in CET1. This eliminates the unpredictability of the old NPA provisioning test entirely.
2. Decoupling Capital Reporting from Prior-Year NPA Behaviour
The old provision penalised banks for lumpy NPA provisioning in the prior year — a pattern that could arise from perfectly legitimate business events. Removing this linkage ensures that current-year capital strength is assessed on current-year fundamentals, which is the correct prudential approach.
3. The Dividend Deduction — Prudential Rationale
The formula's deduction of 0.25 × D × t reflects a core Basel III principle: profits intended to be distributed as dividends should not form part of regulatory capital. By deducting a pro-rated portion of the three-year average dividend, RBI ensures banks are not counting expected dividend payouts as retained earnings-cum-capital. The three-year average smooths out year-to-year dividend variability.
4. Explicit Loss Deduction — No Ambiguity
The new provision explicitly states that cumulative net loss up to quarter end must be fully deducted from CET1. While implied earlier, explicit codification removes all ambiguity — loss-making banks cannot benefit from partial CET1 recognition in any quarter.
5. Uniform Treatment Across Bank Segments
By issuing parallel amendment directions for all three categories simultaneously, RBI achieves regulatory consistency across the banking sector. The same conditions and formula apply whether the bank is a large Commercial Bank, a Small Finance Bank, or a Payments Bank — simplifying compliance and interpretation uniformly.
📅 Regulatory Timeline
| Date | Development |
|---|---|
| Nov 28, 2025 | RBI issues consolidated Master Directions on Prudential Norms on Capital Adequacy for Commercial Banks, SFBs, and Payments Banks |
| Apr 8, 2026 | RBI publishes three Draft Amendment Directions for stakeholder consultation — proposes removal of 25% NPA provisioning condition |
| May 8, 2026 | Final Amendment Directions released — effective immediately. Annex on feedback received published. Press Release 2026-2027/227 issued. |
| FY 2026-27 onward | Banks apply EPt = NPt − 0.25 × D × t for quarterly CET1 profit inclusion. NPA provisioning test permanently discontinued for all covered categories. |
❓ Frequently Asked Questions
📝 Bottom Line — What Banks Should Do Now
This amendment is a meaningful and welcome simplification. The old NPA provisioning test linked current-year capital reporting to prior-year provisioning behaviour — an indirect and often arbitrary constraint. The new formula-based approach is transparent, calculable, and prudentially sound. Capital planning teams across Commercial Banks, Small Finance Banks, and Payments Banks should update their CRAR computation models immediately with the new formula EPt = NPt − 0.25 × D × t. No transition period applies — the change is live from May 8, 2026.
- Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Fifth Amendment Directions, 2026 (RBI/2026-27/79, DOR.CAP.REC.No.68/21.01.002/2026-27)
- Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Fourth Amendment Directions, 2026 (RBI/2026-27/80, DOR.CAP.REC.No.69/21.01.002/2026-27)
- Reserve Bank of India (Payments Banks – Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026 (RBI/2026-27/81, DOR.CAP.REC.No.70/21.01.002/2026-27)
- Press Release – Review of guidelines on inclusion of quarterly profits to CET1 capital for computation of CRAR for Banks (May 08, 2026)
This article is for informational purposes only and does not constitute legal, regulatory, or financial advice. Readers should refer to the original RBI Directions and Press Release for authoritative text.
