RBI draft circular: Banks' capital market exposure to be limited to 20% of tier 1 capital

The Reserve Bank of India (RBI) on Friday issued a draft circular proposing limits on banks’ exposure to the capital markets.

Under the draft guidelines, a bank’s total direct investments in capital markets and acquisition finance should not exceed 20% of its tier 1 capital, aiming to ensure financial stability and prudent risk management.

Key Highlights of RBI’s Draft Circular on Banks’ Capital Market Exposure

The RBI’s draft circular seeks to restrict banks from taking excessive risks in capital markets. By capping exposure at 20% of tier 1 capital, the central bank aims to:

• Protect banks from market volatility
• Ensure adequate capital buffers
• Promote safer lending and investment practices

This proposal is part of the RBI’s ongoing effort to maintain a stable and resilient banking system.

Amendments to NBFC Scale-Based Regulations and Infrastructure Risk Weights

Alongside the draft circular, the RBI also issued amendment directions to its 2023 Master Direction on Non-Banking Financial Companies (NBFCs). These changes primarily focus on infrastructure loans and risk weights for NBFC exposures.

Key points include:
High-Quality Infrastructure Projects Definition:

• Projects must have at least one year of satisfactory operations, standard asset classification, reliable revenue from government or public sector counterparties, strong creditor protection measures, sufficient funding arrangements, and restrictions on actions that could harm creditors.

Risk Weight Adjustments for NBFC Loans:

• Loans to high-quality infrastructure projects with 10% or more of the sanctioned amount repaid: 50% risk weight
• Loans with 5–10% repayment: 75% risk weight
• Other qualifying infrastructure projects will be subject to applicable risk weights as per existing regulations.

Implementation Date:
The amendments will come into effect from 1 April 2026, or earlier if an NBFC adopts the directions in full before that date.