RBI Lets Banks Count Quarterly Profits in CRAR Without NPA Test
Why in the news
On May 8, 2026 the RBI issued a circular easing how banks count capital. The tie to bad-loan provisioning has been dropped, so banks can show a stronger Capital Adequacy Ratio during the year.
What changed
| Aspect | Earlier rule | New rule |
|---|---|---|
| Adding current-year profit to capital | Permitted only if NPA provisioning deviated by no more than 25% from its four-quarter average | Allowed quarterly with no further conditions |
| Timing | Often held up by the deviation check | Smooth quarter-by-quarter inclusion |
Key facts
- Date of circular: May 8, 2026, issued by the RBI.
- The 25% NPA deviation condition has been removed.
- Quarterly profit inclusion becomes a plain accounting entry.
About CAR / CRAR
- Capital Adequacy Ratio (CAR), also called CRAR (Capital-to-Risk Weighted Assets Ratio), weighs a bank’s capital against its risk-weighted credit exposure, showing its ability to absorb losses before turning insolvent.
- Tier 1 (core) capital: Common Equity Tier 1 (paid-up equity, retained earnings) plus Additional Tier 1 (such as perpetual bonds); absorbs losses while the bank keeps operating.
- Tier 2 (supplementary) capital: subordinated debt, revaluation reserves and general provisions; less liquid than Tier 1.
- Risk-weighted assets: assets carry different risk weights, e.g. cash 0% and a personal loan 100%.
Significance
- A higher CAR gives banks more room to lend, since capital acts as a buffer against lending.
- A one-off spike in NPA provisions will no longer stop healthy profits from counting towards capital.
- The step fits the Basel III aim of holding high-quality capital to withstand shocks.
Exam angle
- Full form: CRAR = Capital to Risk-weighted Assets Ratio.
- Rule removed: the 25% deviation test linked to NPA provisions.
- Quarterly profits fall under Tier 1 capital.