MUMBAI: The Reserve Bank of India’s (RBI) plan to implement revised Basel III capital norms from April 1, 2027, is expected to ease capital requirements for banks, particularly through lower risk weights on residential mortgages and MSME loans.
According to analysts, these changes could translate into a 10–50 basis points improvement in Common Equity Tier 1 (CET1) ratios across the banking sector – offering a moderate but meaningful boost to capital efficiency.
The RBI, during its monetary policy announcement last week, said it would adopt the revised framework on capital adequacy and credit risk in line with global Basel III standards. A detailed draft on the standardised approach for credit risk is also expected shortly.
Sharpened gains for PSU banks
The biggest beneficiaries of the revised capital norms are likely to be public sector banks, which have a higher proportion of MSME lending in their portfolios compared with private peers.
The RBI continues to incentivise credit flow to certain sectors of the economy, with MSMEs remaining a focus area. PSU banks, given their deeper exposure to MSMEs, stand to gain more from the proposed reduction in risk weights, said Shivaji Thapliyal, head of research at Yes Securities.
What the numbers suggest
An analysis by IIFL Financials estimates that even a flat 5 percentage point reduction in risk weights across residential mortgages and MSME loans could result in a CET1 ratio improvement of 10 to 50 basis points, depending on the bank’s loan mix.
A report by Bank of Baroda (BoB) also noted that the lower capital charges would enhance capital efficiency, especially in retail housing and priority-sector MSME lending – two segments that have seen significant regulatory focus in recent years.
The RBI’s move aligns with its broader aim of strengthening the capital base of Indian banks while ensuring that capital rules do not constrain credit flow to priority sectors.
While implementation is a few years away, banks are likely to start adjusting their capital strategies and portfolio compositions to make the most of the new framework.
