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RBI relaxes Leverage Ratio to 3.5%

Date: 08 June 2019 Tags: Basic Concepts

The Reserve Bank of India (RBI) in its second bi-monthly policy review has mandated leverage ratio of 3.5% for all the banks except for domestic systemically important banks (D-SIBs), which will have to maintain 4% leverage ratio. This decision in line with Basel-III standards and will help banks to expand their lending activities.

What is leverage ratio?

  • As defined under Basel-III norms, it is Tier-I capital as percentage of bank’s total exposures. It is designed to capture leverage associated with both on- and off-balance sheet exposures.
  • Total exposure: In this case, it is defined as sum of following exposures on-balance sheet exposures, securities financing transaction exposures, derivative exposures and off-balance sheet items.
  • It was introduced for banks post financial crisis of 2008, as one of underlying features of the crisis was build-up of excessive on- and off-balance sheet leverage in the banking system.
  • The minimum requirement for leverage ratio set by Basel Committee on Banking Supervision (BCBS) is 3%. RBI has mandated banks to publicly disclose their Basel-III leverage ratio on consolidated basis from 1 April, 2015.
  • Significance: It is considered as important supplement to risk-based capital requirements. Therefore, banks are required to disclose, on quarterly basis, following irrespective of whether financial statements are audited: Tier-1 capital, exposure measure and leverage ratio. Lowering of ratio with capital as numerator staying fixed, will imply expansion of denominator, or bank’s lending activity.