The Reserve Bank of India (RBI) has introduced significant amendments to its leverage ratio framework, directly impacting commercial banks’ capital adequacy requirements. This RBI Notification 2026, issued on October 23, 2026, fundamentally alters how Domestic Systemically Important Banks (D-SIBs) and branches of Global Systemically Important Banks (G-SIBs) in India calculate and maintain their leverage ratios.
What Changed: The 30-Second Answer
The RBI, via its notification RBI/2026-27/297 dated October 23, 2026, has amended the ‘Prudential Norms on Capital Adequacy’ by updating the leverage ratio framework for commercial banks. The key changes include setting a minimum leverage ratio of 4 percent for D-SIBs and 3.5 percent for other banks, while G-SIB branches in India must maintain 3.5 percent plus an applicable buffer. The notification also details new rules for calculating derivative and on-balance sheet exposures, aligning with the latest Basel Committee standards.
Why Did the RBI Issue This RBI Notification 2026?
The Reserve Bank of India issued these Eleventh Amendment Directions, 2026, to align India’s leverage ratio framework with the latest ‘leverage ratio 2017 standard’ issued by the Basel Committee on Banking Supervision. This move reflects a broader regulatory push towards international best practices in capital adequacy, ensuring the resilience of the Indian banking system. The amendments are made under the powers conferred by Section 35A of the Banking Regulation Act, 1949, indicating the RBI’s satisfaction that these changes are “necessary and expedient in the public interest.”
Who Does This RBI Notification 2026 Apply To?
This RBI Notification 2026 applies to all commercial banks operating under the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025. Specifically, it introduces differentiated requirements for:
- Domestic Systemically Important Banks (D-SIBs): These banks now face a minimum leverage ratio requirement of 4 percent.
- Other Banks: All other commercial banks must maintain a minimum leverage ratio of 3.5 percent.
- Branches of Global Systemically Important Banks (G-SIBs) in India (G-SIB branches): These entities must maintain a leverage ratio of 3.5 percent plus any leverage ratio buffer applicable to them as a G-SIB, including additional buffers prescribed by their home regulator.
The circular explicitly states that a bank “shall meet the minimum leverage ratio requirement at all times.”
What Are the New Minimum Leverage Ratio Requirements?
The core of this RBI Notification 2026 lies in its updated minimum leverage ratio requirements:
- For a Domestic Systemically Important Bank (D-SIB), the minimum leverage ratio shall be 4 percent.
- For other banks, the minimum leverage ratio shall be 3.5 percent.
- A G-SIB branch in India shall maintain a leverage ratio of 3.5 percent plus the leverage ratio buffer applicable to it as a G-SIB (including any additional leverage ratio buffer prescribed by the home regulator).
These ratios are defined as the “capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage.”
Capital Distribution Constraints for G-SIB Branches
A crucial addition for G-SIB branches involves capital distribution constraints. If a G-SIB branch fails to meet its leverage ratio buffer requirement, the RBI will impose capital distribution constraints. These constraints depend on both the branch’s common equity tier 1 (CET1) risk-based ratio and its leverage ratio. For example, a G-SIB branch that meets both its CET1 risk-based capital requirements (including a 5.5 percent minimum, a 2.5 percent capital conservation buffer, G-SIB higher loss-absorbency, and countercyclical capital buffer if applicable) and its Tier 1 leverage ratio requirement (defined as a 3.5 percent minimum and the G-SIB leverage ratio buffer) will not face minimum capital conservation standards.
However, if a G-SIB branch fails one of these requirements, it will be subject to the associated minimum capital conservation standards. If it fails both, the higher of the two minimum capital conservation standards will apply. The circular provides a table outlining minimum capital conservation standards for CET1 risk-based and Tier 1 leverage ratio requirements for G-SIB branches in the first bucket of higher loss-absorbency requirements (where a 1 percent risk-based G-SIB capital buffer applies), ranging from 100% of earnings for the lowest thresholds to 0% for the highest.
How Must Banks Calculate Exposure Measures?
The RBI has provided detailed guidance on calculating the exposure measure, which forms the denominator of the leverage ratio. Both the capital measure and the exposure measure must be calculated on a quarter-end basis. However, banks may, with RBI approval, use more frequent calculations (e.g., daily or monthly averaging) if applied consistently.
General Measurement Principles
The leverage ratio exposure measure generally follows gross accounting values. Banks are instructed not to consider physical or financial collateral, guarantees, or other credit risk mitigation techniques to reduce the exposure measure, nor are they permitted to net assets and liabilities unless explicitly specified. Any item deducted from Tier 1 capital and regulatory adjustments (other than those related to liabilities) must also be deducted from the leverage ratio exposure measure. Conversely, liability items, such as gains/losses on fair valued liabilities, cannot be deducted.
For traditional securitisations, an originating bank can exclude securitised exposures 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 “particularly vigilant to transactions and structures that have the result of inadequately capturing its sources of leverage,” citing examples like certain SFTs or using agency models to benefit from more favorable treatment. The RBI reserves the right to take supervisory actions, including imposing Pillar 2 capital charges, if such concerns arise.
Furthermore, the RBI may temporarily exempt central bank reserves (balances maintained with the Reserve Bank) from the leverage ratio exposure measure in exceptional macroeconomic circumstances to facilitate monetary policies. Should this occur, the minimum leverage ratio requirement will be commensurately increased to offset the impact. Banks will also be required to disclose the impact of any temporary exemption alongside ongoing public disclosure of the leverage ratio without such exemption.
The total leverage ratio exposure measure is the sum of four components:
- On-balance sheet exposures (excluding derivative and SFT exposures).
- Derivative exposures.
- Securities Financing Transaction (SFT) exposures.
- Off-balance sheet (OBS) items.
On-Balance Sheet Exposures
Banks must include all balance sheet assets in their leverage ratio exposure measure, except for derivative and SFT assets covered separately. Fiduciary assets can be excluded if they meet derecognition and deconsolidation criteria under applicable accounting standards. Non-derivative assets are included at their accounting values less associated specific provisions. General provisions or general loan loss reserves that have reduced Tier 1 capital must also be deducted.
The RBI has clarified the treatment of unsettled trades and cash pooling arrangements. For unsettled trades using trade date accounting, banks must reverse out any offsetting between cash receivables and payables, though offsetting is permitted if financial assets are fair valued through income, 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) to 269(4).
For cash pooling arrangements, if individual account balances are transferred daily into a single account, they are deemed extinguished, and the single account balance forms the basis for the exposure measure. If transfers are not daily, specific conditions must be met, including a legally enforceable right to transfer balances and no maturity mismatches, for the single account balance to be used. Otherwise, individual balances must be reflected separately.
Derivative Exposures: SA-CCR and CEM
The RBI Notification 2026 introduces distinct methodologies for calculating derivative exposures based on the approach adopted by the bank for counterparty credit risk:
- Current Exposure Method (CEM): Banks using CEM will continue to calculate derivative exposures as per the methodology specified in paragraph 267.
- Standardised Approach for Counterparty Credit Risk (SA-CCR): A new paragraph, 267A, is inserted for banks adopting SA-CCR. For these banks, derivative exposures are included via two components: replacement cost (RC) and potential future exposure (PFE). The exposure measure is calculated as 1.4 times (RC + PFE). The multiplier for PFE is fixed at one for the leverage ratio framework. Written options must be included, even if they qualify for zero exposure at default in the risk-based capital framework.
Collateral received for derivatives generally does not reduce the leverage ratio exposure measure, adhering to the principle that collateral does not inherently reduce leverage. However, the maturity factor in the PFE add-on calculation can recognize the PFE-reducing effect from regular variation margin exchange. Collateral provided must be grossed up if it has reduced balance sheet assets. Cash variation margin can be treated as a pre-settlement payment if specific conditions are met, including daily exchange based on mark-to-market valuation and non-segregation of cash received (for non-QCCP trades).
These detailed calculations underscore the complexity involved in modern capital adequacy rules, a constant theme in financial regulation, as seen in other recent directives like IFSCA’s algorithmic trading approvals.
What This RBI Notification 2026 Does NOT Cover
While comprehensive on leverage ratio calculations, this RBI Notification 2026 does not introduce new rules or thresholds for other aspects of capital adequacy beyond the leverage ratio framework. It explicitly refers to ‘Chapter VII: Leverage Ratio framework’ of the existing Directions, 2025. It also does not specify an effective date for the amendments; the directions are issued as “Amendment Directions hereinafter specified,” suggesting immediate applicability upon issue date, October 23, 2026. No penalty provisions for non-compliance are detailed within this specific circular, though such provisions would typically exist in the overarching ‘Prudential Norms on Capital Adequacy) Directions, 2025’ that these amendments modify.
The Algoy Perspective
This RBI Notification 2026, while seemingly a technical update, represents a material shift in how Indian commercial banks, particularly D-SIBs and G-SIB branches, must manage their balance sheets and capital. The prescriptive nature of the exposure measure calculations, especially for derivatives under SA-CCR, demands immediate and detailed attention from risk, finance, and compliance teams. The prohibition on netting assets and liabilities, coupled with strict rules on collateral and cash pooling, will likely force a re-evaluation of existing operational practices and potentially impact profitability for certain business lines. Banks haven’t been given a long lead time here; the expectation is clearly for immediate compliance. This could be particularly challenging for banks that still rely on manual processes for exposure aggregation, highlighting the increasing need for robust, automated regulatory reporting systems. The explicit mention of supervisory action for “inadequately capturing sources of leverage” also signals a heightened scrutiny from the regulator, underscoring the importance of transparent and accurate reporting. As we’ve seen with other recent regulatory mandates, such as the RBI’s comprehensive fraud risk management directive, the trend is towards granular, real-time compliance.
Frequently Asked Questions
What is the minimum leverage ratio for D-SIBs and other banks?
As per RBI circular RBI/2026-27/297 dated October 23, 2026, the minimum leverage ratio for a Domestic Systemically Important Bank (D-SIB) shall be 4 percent, and for other banks, it shall be 3.5 percent. This ratio is defined as the capital measure divided by the exposure measure, expressed as a percentage.
How are G-SIB branches in India affected by the new leverage ratio rules?
Branches of Global Systemically Important Banks (G-SIBs) in India must maintain a leverage ratio of 3.5 percent plus any additional leverage ratio buffer applicable to them as a G-SIB, including buffers prescribed by their home regulator. Furthermore, these branches will face capital distribution constraints if they fail to meet their leverage ratio buffer requirement, with the severity depending on both their CET1 risk-based capital ratio and their leverage ratio.
Can banks use daily or monthly averaging for leverage ratio calculations?
Yes, while the default is a quarter-end basis, 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. This flexibility allows banks to manage their exposures more dynamically, though it requires explicit regulatory consent.
What is the impact of central bank reserves on the leverage ratio exposure measure?
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. If such an exemption is granted, the RBI will commensurately increase the calibration of the minimum leverage ratio requirement to offset the impact, and banks will be required to disclose this impact alongside their regular disclosures.
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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