RBI eases bank capital norms: CRAR, IFR changes 2026

What RBI announced on April 8

The Reserve Bank of India (RBI) said on April 8 it plans to ease two important elements of banks’ regulatory framework. The central bank proposed changes that would let banks include quarterly profits in the capital-to-risk-weighted assets ratio (CRAR) calculation without linking it to provisioning levels. It also said it would dispense with the requirement for banks to maintain an Investment Fluctuation Reserve (IFR), subject to mark-to-market (MTM) requirements. RBI Governor Sanjay Malhotra shared these proposals as part of the bi-monthly policy review outcome. Draft directions for both measures will be issued shortly and opened for public comments.

CRAR proposal: quarterly profit inclusion condition to go

Under the current framework, banks can include quarterly profits in CRAR computation only if their bad loan provisioning stays within a 25 percent range of the average seen across the four quarters of the prior fiscal year. RBI said it proposes to remove this condition. Malhotra stated that the central bank is proposing to “dispense with this condition” and that draft amendment directions will be issued shortly for public comments. RBI framed the move as part of an effort to streamline capital requirements and unlock more funds for lending. Malhotra also clarified that the change does not alter how net profit is calculated. Instead, it changes how capital adequacy is computed for banks.

IFR set to be scrapped, with MTM safeguards

RBI said it would dispense with the need for banks to maintain the Investment Fluctuation Reserve (IFR), described as an additional buffer against depreciation in the value of their investments. The relaxation is subject to mark-to-market requirements. The central bank will issue draft directions for public consultation. RBI also said guidelines for bank categories are being revised to address operational challenges in complying with the regulatory thresholds on IFR.

Which banks are affected by current market risk rules

The article notes that most commercial banks, excluding small finance banks, rural banks, and payments banks, must maintain a capital charge for market risk. These banks also have to adhere to revised norms for investment portfolio classification, valuation, and operations. The proposed IFR change sits within this broader market-risk and investment-valuation framework. RBI’s consultation process is expected to clarify the final compliance approach once the draft is published.

Dividend framework: net NPA deduction cut to 50%

Separately, RBI updated its dividend payout framework for banks effective from financial year 2026-27. Under the updated framework, banks can deduct only 50% of their net non-performing assets (NPAs) when calculating profits available for distribution, reduced from 100% earlier. The article says this regulatory adjustment is expected to boost government revenues by increasing banks’ reported profitability and their ability to pay higher dividends. It also links the change to the government’s fiscal strategy to raise revenue without raising taxes or borrowing. RBI’s plan to eliminate the IFR requirement is also cited in this context as a step that streamlines regulations and supports bank balance sheets.

Capital preservation concerns flagged in the discussion

The text also frames a policy trade-off around dividends and capital buffers. It notes that lowering the net NPA deduction for dividend calculations from 100% to 50% can increase dividend capacity, but could also reduce retained capital if banks choose higher payouts over conservation. The discussion references volatile global energy markets as one factor that can heighten uncertainty, where stronger buffers may matter. It also states that NPAs have fallen to multi-decade lows, while cautioning that a reduced provisioning-linked rule for dividends might affect how underlying risk is perceived.

ECL transition: RBI’s Draft Directions 2025

In another regulatory track, RBI has introduced Draft Directions 2025 proposing a move to an Expected Credit Loss (ECL) framework. The draft directions on asset classification, provisioning and income recognition are intended to apply to all Scheduled Commercial Banks (SCBs) and be effective April 1, 2027. RBI has invited public and stakeholder comments on the draft guidelines by November 30, 2025. The ECL framework is described as a shift from a retrospective provisioning model to a forward-looking approach. The draft retains the concept of NPAs, and introduces a prudential floor, requiring banks to provide the higher of the prudential floor and the ECL computed by management.

What the draft ECL model requires banks to estimate

The proposed ECL framework is said to be risk-sensitive and applies to scheduled commercial banks, including foreign banks. It replaces a rule-based approach with estimates based on probability of default (PD), loss given default (LGD), and exposure at default (EAD). The estimates must incorporate historical data, current credit conditions, and macroeconomic forecasts. The definition of “default” remains consistent with existing NPA norms to ensure continuity. RBI also introduced the concept of Effective Interest Rate (EIR) for income recognition under the draft directions.

Credit risk capital charge draft and a five-year glide path

RBI has also released draft directions on Capital Charge for Credit Risk under the Standardised Approach. The stated objective is to enhance robustness, granularity, and risk sensitivity in the framework for calculating capital charge. The changes include more granular risk weight treatment for exposures to corporates, MSMEs, and real estate; inclusion of ‘transactors’ (credit cards with timely repayments during the previous 12 months) under the regulatory retail category; and revisions in credit conversion factors for off-balance sheet exposures. For the ECL transition, the draft notes it may result in additional one-time provisioning, while stating the overall impact on minimum regulatory capital is expected to be minimal, with banks continuing to meet requirements comfortably. RBI also proposed an optional five-year glide path to manage the initial impact on capital adequacy.

Project finance provisioning: final norms effective Oct 1, 2025

The broader set of RBI changes in the material also includes final project finance directions effective October 1, 2025. Under these final norms, lenders are required to maintain 1% standard asset provisioning for projects under construction, lower than the 5% suggested in the earlier draft. For under-construction commercial real estate (CRE) exposures, the requirement is 1.25%. For CRE-Residential Housing (CRE-RH), it is 1% during construction, and for other project exposures, 1% during construction. The text notes banks currently keep a provision of 0.4% on outstanding exposures during construction, and for projects currently operational, the standard provisioning requirement will remain 0.4%.

Key numbers and dates at a glance

Why this matters for banks and investors

Taken together, the April 8 proposals aim to simplify capital computation and investment-buffer requirements, while RBI continues to run consultations on deeper credit risk and provisioning reforms. The CRAR proposal could change the timing and ease with which quarterly profits are recognised in regulatory capital metrics, without changing net profit itself, as the governor noted. Removing IFR would reduce a specific reserve requirement, while still tying investment valuation discipline to MTM norms. Separately, the dividend framework change from FY 2026-27 alters how much net NPA is deducted for calculating distributable profits. And the ECL and credit risk capital charge drafts outline longer-horizon structural shifts with defined consultation timelines.

What to watch next

RBI said draft directions on the CRAR profit inclusion change and the IFR removal will be issued shortly for public comments. The subsequent feedback process will determine final wording and implementation details. For the ECL and credit risk capital charge drafts, stakeholders have a stated deadline of November 30, 2025 to submit comments, and the asset classification and provisioning framework is set to apply from April 1, 2027. Market participants will track these consultations for clarity on transition, disclosures, and capital impact as the drafts move toward final rules.