The Reserve Bank of India (RBI) has issued significant amendments to its capital adequacy framework, directly impacting commercial banks’ leverage ratio calculations. This RBI Notification 2026, dated October 23, 2026, and referenced RBI/2026-27/297, revises Chapter VII of the existing ‘Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025’. The changes aim to align Indian regulations with the Basel Committee on Banking Supervision’s latest leverage ratio framework, specifically the ‘leverage ratio 2017 standard’.
What Changed: The 30-Second Answer
The RBI, through its Notification RBI/2026-27/297 dated October 23, 2026, has amended the leverage ratio framework for commercial banks. Key changes include revised minimum leverage ratios for Domestic Systemically Important Banks (D-SIBs) and other banks, new capital distribution constraints for branches of Global Systemically Important Banks (G-SIBs) in India, and detailed methodologies for calculating on-balance sheet, derivative, and securities financing transaction exposures, aligning with Basel III standards.
Who Does This RBI Notification 2026 Apply To?
This amendment specifically targets commercial banks operating under the Reserve Bank of India’s regulatory purview. The provisions make explicit distinctions for:
- Domestic Systemically Important Banks (D-SIBs): These banks face a minimum leverage ratio requirement of 4 per cent.
- Other Banks: All other commercial banks, not designated as D-SIBs, must maintain a minimum leverage ratio of 3.5 per cent.
- Branches of Global Systemically Important Banks (G-SIBs) in India: These entities, referred to as ‘G-SIB branches’, are subject to a 3.5 per cent leverage ratio plus any leverage ratio buffer applicable to them as a G-SIB, including additional buffers prescribed by their home regulator. They also face specific capital distribution constraints if they fail to meet their leverage ratio buffer requirements.
The directions also clarify that the Basel III leverage ratio framework will follow the same scope of regulatory consolidation, including consolidation criteria, as already used for the risk-based capital framework outlined in paragraph 8 of the original Directions.
What Are the New Minimum Leverage Ratio Requirements?
The RBI has set distinct minimum leverage ratios based on the systemic importance of the bank:
- For a Domestic Systemically Important Bank (D-SIB), the minimum leverage ratio shall be 4 per cent.
- For other banks, the minimum leverage ratio shall be 3.5 per cent.
- A branch of a Global Systemically Important Bank (G-SIB) in India must maintain a leverage ratio of 3.5 per cent plus the leverage ratio buffer applicable to it as a G-SIB, which includes any additional leverage ratio buffer prescribed by the home regulator.
All banks are required to meet their minimum leverage ratio requirement at all times. The capital measure (numerator) divided by the exposure measure (denominator) defines the leverage ratio, expressed as a percentage.
What Are the Capital Distribution Constraints for G-SIB Branches?
The RBI Notification 2026 introduces specific capital distribution constraints for G-SIB branches that do not meet their leverage ratio buffer requirement. These constraints depend on both the branch’s common equity tier 1 (CET1) risk-based ratio and its leverage ratio:
- A G-SIB branch meeting both its CET1 risk-based capital requirements (defined as a 5.5 per cent minimum, a 2.5 per cent capital conservation buffer, the G-SIB higher loss-absorbency requirement, and countercyclical capital buffer, if applicable) and its Tier 1 leverage ratio requirement (defined as a 3.5 per cent leverage ratio minimum requirement and the G-SIB leverage ratio buffer) will not be subject to minimum capital conservation standards.
- If a G-SIB branch fails to meet one of these requirements, it will be subject to the associated minimum capital conservation standards.
- If a G-SIB branch fails to meet both requirements, it will be subject to the higher minimum capital conservation standard related to its risk-based capital requirement or leverage ratio.
The circular provides a table illustrating these minimum capital conservation standards for G-SIB branches in the first bucket of higher loss-absorbency requirements (where a 1 per cent risk-based G-SIB capital buffer applies). For example, if a G-SIB branch has a CET1 risk-based ratio between 5.5% and 6.375% and a Tier 1 leverage ratio between 3.5% and 3.625%, it faces a 100% minimum capital conservation ratio, expressed as a percentage of earnings.
How to Calculate the Leverage Ratio Exposure Measure?
The general measurement principle for the leverage ratio exposure measure largely follows gross accounting values. Banks must calculate both the capital measure and the exposure measure on a quarter-end basis. However, a bank may, with the Reserve Bank’s approval, use more frequent calculations like daily or monthly averaging, provided it does so consistently.
General Measurement Principles
The exposure measure generally follows gross accounting values. Banks must not take into account physical or financial collateral, guarantees, or other credit risk mitigation techniques to reduce the leverage ratio exposure measure, nor can they net assets and liabilities, unless specifically permitted.
Crucially, any item deducted from Tier 1 capital and regulatory adjustments not related to liabilities must also be deducted from the leverage ratio exposure measure. For example, investments in the capital of banking, financial, or insurance entities not included in the regulatory scope of consolidation, which are deducted from CET1 or AT1 capital, shall also be deducted from the leverage ratio exposure measure.
Conversely, liability items, such as gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to changes in the bank’s own credit risk, shall not be deducted from the leverage ratio exposure measure.
Originating banks can exclude securitised exposures from their leverage ratio exposure measure if the securitisation meets the operational requirements for risk transference recognition as per paragraph 96 of the Directions. Otherwise, securitised exposures must be included.
The RBI warns banks to be vigilant regarding transactions and structures that inadequately capture sources of leverage. Examples include certain SFTs, adopting an agency model to benefit from more favourable treatment, collateral swap trades structured to mitigate inclusion, or structures used to move assets off the balance sheet. If concerns arise, the RBI may take supervisory actions, including requiring enhancements in leverage management, imposing operational requirements, or mandating a Pillar 2 capital charge.
In exceptional macroeconomic circumstances, the Reserve Bank may temporarily exempt central bank reserves (balances maintained with the Reserve Bank) from the leverage ratio exposure measure to facilitate monetary policies. Should this occur, the RBI will commensurately increase the minimum leverage ratio requirement to offset the impact. Banks will also need to disclose the impact of any such temporary exemption alongside ongoing public disclosure of the leverage ratio without the exemption.
The total leverage ratio exposure measure is the sum of four main exposure types:
- On-balance sheet exposures (excluding on-balance sheet derivative and SFT exposures).
- Derivative exposures.
- SFT exposures.
- Off-balance sheet (OBS) items.
On-Balance Sheet Exposures
All balance sheet assets, including on-balance sheet derivatives collateral and collateral for SFTs, must be included in the leverage ratio exposure measure, except for those specifically covered under derivative and SFT exposures. Fiduciary assets recognized on the balance sheet can be excluded if they meet derecognition and deconsolidation criteria under applicable accounting standards.
Non-derivative assets on the balance sheet should be included at their accounting values, less deductions for associated specific provisions. General provisions or general loan loss reserves that have reduced Tier 1 capital must also be deducted.
Treatment of Unsettled Trades
For banks using trade date accounting, any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets must be reversed. However, offsetting is allowed if the bought/sold financial assets are fair valued through income, included in the trading book, and settled on a delivery-versus-payment (DvP) basis. Banks using settlement date accounting will follow specific provisions in paragraphs 269(1), 269(2), 269(3), and 269(4).
Treatment of Cash Pooling Arrangements
Where a cash pooling arrangement involves a daily transfer of individual customer account balances into a single account, the individual accounts are deemed extinguished and transformed into a single balance, provided the bank is not individually liable. If transfers are not daily, a single account balance can still be the basis if specific conditions are met, including a legally enforceable right to transfer balances, the bank’s discretion to exercise this right, adequate transfer frequency as deemed by the RBI, no maturity mismatches among balances (or all balances are overnight/on-demand), and interest/fees based on the combined balance. Failure to meet these conditions requires individual balances to be reflected separately.
Derivative Exposures (SA-CCR)
Banks adopting the Standardised Approach for Counterparty Credit Risk (SA-CCR) will calculate derivative exposures based on two components: replacement cost (RC) and potential future exposure (PFE). The exposure measure is calculated as alpha (1.4) times the sum of RC and PFE. For eligible bilateral netting contracts, the formula applies at the netting set level. Written credit derivatives are subject to additional treatment.
Collateral received for derivatives generally does not reduce the leverage ratio exposure measure, as it doesn’t reduce the inherent leverage. Conversely, collateral provided that reduces balance sheet assets must be grossed up in the exposure measure.
Cash variation margin exchanged between counterparties can be treated as a pre-settlement payment if specific conditions are met, including non-segregation of cash for non-QCCP trades and daily calculation and exchange based on mark-to-market valuation.
The Algoy Perspective
This RBI Notification 2026 demands more than just a mechanical adjustment of ratios; it necessitates a deep dive into the underlying data architecture and accounting methodologies. The granular details provided for calculating on-balance sheet and derivative exposures, particularly the nuances around cash pooling arrangements and unsettled trades, mean that banks cannot simply overlay these new rules onto existing, potentially disparate, data sets. The explicit requirement for G-SIB branches to consider home regulator buffers adds another layer of complexity, demanding seamless integration of international and domestic regulatory interpretations. Practitioners should anticipate significant challenges in ensuring consistent, accurate, and auditable data aggregation, especially given the emphasis on “gross accounting values” and specific exclusions/inclusions for collateral and provisions. This isn’t just a compliance exercise; it’s a data transformation imperative, similar to the challenges faced during the implementation of BCBS 239 data governance principles. Banks would do well to review their data lineage and reconciliation processes now.
Frequently Asked Questions
What is the definition of the leverage ratio as per this RBI Notification 2026?
As per paragraph 262(1) of the RBI Notification 2026, the Basel III leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage. The formula is: Leverage Ratio = Capital Measure / Exposure Measure.
Are there any conditions under which central bank reserves can be exempted from the leverage ratio exposure measure?
Yes, paragraph 265(7) states that the Reserve Bank may temporarily exempt central bank reserves (i.e., balance maintained with the Reserve Bank) from the leverage ratio exposure measure in exceptional macroeconomic circumstances to facilitate monetary policies. If this occurs, the RBI will also increase the calibration of the minimum leverage ratio requirement commensurately to offset the impact, and banks must disclose the impact of any such exemption.
How often must banks calculate the capital and exposure measures?
Paragraph 262(5) of the circular mandates that both the capital measure and the exposure measure are to be calculated on a quarter-end basis. However, a bank may, subject to the Reserve Bank’s approval, use more frequent calculations (e.g., daily or monthly averaging) as long as it does so consistently.
What is the treatment for collateral received in connection with derivative contracts for the leverage ratio exposure measure?
As per paragraph 267A(4)(i), collateral received in connection with derivative contracts does not necessarily reduce the leverage inherent in a bank’s derivative position. As a general principle, and unless otherwise permitted, collateral received shall not be netted against derivative exposures, whether or not netting is permitted under the bank’s operative accounting or risk-based capital framework. Therefore, banks shall not reduce the leverage ratio exposure measure by any collateral received from the counterparty.
Sources and Further Reading
- Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Eleventh Amendment Directions, 2026
- Reserve Bank of India
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