Wednesday November 3, 04:02 AM Source: Indian Express Finance By fe Bureau
In a bid to help banks to infuse additional capital in their insurance subsidiaries, the Reserve Bank of India (RBI) has said the entire investments in the paid up equity of the subsidiaries (including insurance entities), will be deducted at 50% from tier-I and 50% from tier-II capital.
"Earlier the entire amount which the bank was investing in insurance companies was getting deducted from tier-I for calculating the capital adequacy of the parent banks, but now will be deducted equally both from tier-I and II. In this way the banks will be in a position to infuse more capital to the insurance subsidiaries,'' said Ashvin Prekh, partner, national leader, global financial services, Ernst & Young.
RBI has also reduced the investment threshold in subsidiaries to 20% from 30% for applying its new norms.
RBI had constituted an internal group on the supervision of financial conglomerates (FCs) in the country. The internal group had made various recommendations for strengthening the supervision of the FCs, including changes in certain regulatory norms.
As per Basel II framework, investments in the equity of subsidiaries or significant minority investments in banking, securities and other financial entities, where control does not exist, together with other regulatory capital investment in these entities are required to be excluded from the banking group's capital if these entities are not consolidated.
Accordingly, RBI has proposed that the entire investments in the paid up equity of the entities (including insurance entities), where such investment exceeds 20% of the paid up equity of such entities will be deducted at 50% from tier-I and 50% from tier-II capital when these are not consolidated for capital purposes with the bank. In addition, entire investments in other instruments eligible for regulatory capital status in these entities shall also be deducted at 50% from tier-I and 50% from tier-II capital; and the deductions indicated above will also be applicable while computing capital adequacy ratio of the bank on a solo basis.
The capital adequacy requirement will be further calibrated after finalisation of the Basel III rules.
Also, in order to limit the inter-connectedness between the bank and other group entities, the central bank has proposed to put in place an appropriate limit for such transactions and exposures, both for a single entity and on an aggregate basis for all other group entities.
The detailed guidelines in this regard will be issued separately.
View the original article here
