RBI eases CRAR rules 2026: quarterly profit add-back

What the RBI changed, and why it matters

The Reserve Bank of India (RBI) has eased how banks can recognise current-year profits in regulatory capital while computing the capital to risk-weighted assets ratio (CRAR). The change is part of the Reserve Bank of India (Commercial Banks - Prudential Norms on Capital Adequacy) Fifth Amendment Directions, 2026 and was communicated through a circular issued on Friday. The key shift is that banks may now reckon profits in the current financial year for CRAR calculation on a quarterly basis without an additional qualifying condition linked to non-performing assets (NPAs).

The RBI has framed the move as a simplification of capital computation, aimed at streamlining requirements while retaining safeguards around verification and eligible-profit calculation. Governor Sanjay Malhotra also clarified in the policy communication that the change does not alter the way net profit is calculated. Instead, it changes how much of that profit can be recognised in regulatory capital for capital adequacy purposes.

The earlier rule: quarterly profit recognition tied to provisioning behaviour

Under the earlier framework, banks could include quarterly profits in CRAR computation, but only if they met an added condition related to NPA provisioning. Specifically, incremental provisions made for NPAs at the end of any of the four quarters of the previous financial year could not deviate by more than 25% from the average of those four quarters.

This meant capital recognition could be constrained even when a bank had earned profits, if provisioning patterns did not stay within the permitted band. The RBI reviewed this and decided to do away with this qualifying condition, removing the linkage between quarterly profit inclusion in CRAR and the prior-year provisioning deviation test.

The new CET1 inclusion framework: audit requirement and a formula

The amendment updates the provision on inclusion of quarterly profits in Common Equity Tier 1 (CET1) capital. Banks may reckon profits in the current financial year for CRAR calculation on a quarterly basis, subject to conditions that include quarterly audit or limited review of financial statements.

The RBI has also prescribed a standardised formula to compute the amount of profit eligible to be recognised. The formula applies for each quarter ‘t’ (where t varies from 1 to 4), and it includes a deduction linked to historical dividend payouts. In addition, any cumulative net loss up to the quarter end must be fully deducted while calculating CET1 capital for the relevant quarter.

Eligible profit formula: what it includes and what it deducts

The RBI’s direction sets out the calculation explicitly. Eligible profits up to the quarter are derived from net profits up to the quarter, reduced by a dividend-linked adjustment. The variable ‘D’ is defined as the average dividend paid during the last three financial years.

The directions also state that the cumulative net loss up to the quarter end shall be fully deducted while computing CET1 capital for the relevant quarter. This is positioned as a prudential safeguard so that loss-making performance is not masked by partial-period adjustments.

Which banks are covered

The RBI’s extant guideline referenced commercial banks (excluding Regional Rural Banks and Local Area Banks) for quarterly profit recognition in CRAR, and the revised framework is issued under the 2026 amendment directions for commercial banks. Similar directions have also been issued for small finance banks and payments banks, aligning how quarterly profits can be included across these categories.

The RBI has anchored the amendment process in consultation. It issued draft amendment directions in April and sought stakeholder feedback, but did not accept suggestions to retain yearly CET1 accounting with quarterly reviews. The draft amendment directions released on April 8, 2026 were opened for public consultation until April 29, 2026.

How the consultation process is being run

Stakeholders were invited to submit comments on the draft amendment directions until April 29, 2026. The RBI said feedback could be submitted via the ‘Connect 2 Regulate’ link on its website, or forwarded to the Chief General Manager, Balance Sheet Group, Department of Regulation, Central Office, RBI, Mumbai, or by email with the specified subject line relating to the review of quarterly profits in CET1 for CRAR.

This consultation format signals that while the provisioning-linked condition is being removed, RBI still wants standardised computation and quarterly verification to remain central to the framework.

IFR proposal: a parallel move to simplify investment buffers

Alongside the CRAR profit-inclusion change, the RBI also proposed dispensing with the requirement for banks to maintain an Investment Fluctuation Reserve (IFR), subject to mark-to-market (MTM) requirements. The RBI described IFR as an additional buffer against depreciation in the value of investments and indicated that draft directions would be issued for public consultation.

In the broader explanation provided, IFR has been used to absorb MTM losses or diminution in investment value and has been eligible for inclusion in Tier II capital up to 1.25% of risk-weighted assets. The policy communication also noted drawdown mechanics, including the use of excess IFR above a prescribed level at year-end and restrictions when IFR is below that level, tied to meeting CET I or Tier I shortfalls and to MTM losses versus profits on sale of investments.

Market context: capital levels and regulatory intent

The RBI’s policy narrative places the changes within a broader push to streamline capital and buffer requirements. In the same context, it noted that the capital adequacy of scheduled commercial banks stood at 16.91% as of December 2025, which is above regulatory thresholds.

From a market-read perspective, the CRAR change mainly affects the timing and ease of recognising quarterly profits in CET1 for regulatory ratios, without changing the underlying net profit number. The IFR proposal, meanwhile, reduces a specific reserve requirement while still keeping investment valuation discipline linked to MTM norms.

Key measures at a glance

Why this matters for investors and banks’ reported ratios

For investors tracking banks’ capital buffers, the removal of the NPA-provisioning deviation condition reduces a specific compliance trigger that could have limited quarterly profit recognition in CRAR. At the same time, the RBI has not moved to an unrestricted approach: it requires quarterly audited or limited-reviewed financials and caps eligible profits through a formula linked to historical dividend payouts.

For banks, the impact is primarily operational and regulatory reporting related: how quickly profits can be reflected in CET1 for CRAR, and how capital adequacy is computed quarter by quarter. The RBI has also signalled continued consultation-driven changes, with draft directions and timelines clearly laid out for stakeholder inputs.

Conclusion

The RBI’s Fifth Amendment Directions, 2026 and related draft changes simplify quarterly profit recognition in CET1 for CRAR by removing the earlier NPA-provisioning deviation condition, while retaining audit and formula-based safeguards. In parallel, the RBI has proposed scrapping IFR subject to MTM requirements, with draft directions to follow for consultation. Next milestones include the close of public comments on the CRAR-related draft by April 29, 2026, and subsequent RBI communication on final wording and implementation.