RBI notifies Basel III leverage ratio rules effective April 2027
The Reserve Bank of India on 23 October 2026 issued Directions aligning the leverage ratio with the Basel Committee on Banking Supervision's Leverage Ratio 2017 Standard from 1 April 2027. The minimum stays 4 per cent for domestic systemically important banks and 3.5 per cent for others. Separate Directions specify when the Basel III Standardised Approach for operational-risk capital starts.
Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development; GS2 · International Institutions
Why this matters for UPSC
GS3 banking: Prelims can ask what the Basel III leverage ratio measures and the Basel Committee's role; Mains, how Basel standards become RBI rules and whether they make banks safer.
Why it matters
A bank lends mostly with borrowed money. Risk-based capital rules let it hold less capital against assets judged safe, and if those judgements are wrong, a bank can pile up borrowing while still looking well capitalised. The leverage ratio is a blunt second check: it compares core capital with everything the bank is exposed to, with no discount for how safe the assets look. Depositors gain because a bank that hits the floor must slow its growth or raise capital before trouble builds. From April 2027, Indian branches of the largest global banks must also hold their global leverage buffer here. The operational-risk change ties a bank's capital to the size of its business and, for larger banks, its own past losses from fraud, system failures or legal cases.
Prelims pointers
- Section 35A of the Banking Regulation Act, 1949 lets the RBI issue directions to banks when it is satisfied that this is necessary and expedient in the public interest.
- The leverage ratio exposure measure uses gross accounting values: collateral, guarantees and other credit risk mitigation generally cannot reduce it, and assets and liabilities are not netted.
- The exposure measure adds four parts: on-balance sheet assets, derivative exposures, securities financing transactions and off-balance sheet items.
- The RBI fixed separate leverage ratio minimums for D-SIBs and other banks by its circular of 28 June 2019, effective from the quarter starting 1 October 2019.
- Under the Basel III Standardised Approach, the Business Indicator is the sum of three parts: interest, lease and dividend; services; and financial components.
- The Basel III Standardised Approach replaces the Basic Indicator Approach, the Standardised and Alternative Standardised Approaches and the Advanced Measurement Approach.
- Operational risk-weighted assets equal the operational risk capital requirement multiplied by 12.5, under the RBI's 2023 Master Direction.
- The Basel Committee's secretariat is at the Bank for International Settlements in Basel; its decisions have no legal force and rely on members' commitments.
Practise a UPSC-style question
With reference to the Basel III leverage ratio, consider the following statements:
1. It is defined as the exposure measure of a bank divided by its capital measure.
2. It is calculated on a quarter-end basis, but the minimum must be met at all times.
3. Physical or financial collateral generally cannot be used to reduce the exposure measure.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Show the answer
Answer: (b) 2 and 3 only
Answer: (b) 2 and 3 only. The ratio puts capital over exposure, not the other way round.
Statement 1: incorrect. The RBI's Directions define the Basel III leverage ratio as the capital measure (numerator) divided by the exposure measure (denominator).
Statement 2: correct. Both measures are calculated at quarter-end, though the bank must meet the minimum leverage ratio at all times.
Statement 3: correct. Unless the rules say otherwise, collateral, guarantees and other credit risk mitigation do not reduce the leverage ratio exposure measure.
Eliminate: Statement 1 is the surest: capital is the numerator. Out: (a), (c), (d).
Trap: Reversed direction. Statement 1 flips numerator and denominator, which reads naturally because the ratio is about exposure.
Remember: Leverage ratio = Tier 1 capital / total exposure, not risk-weighted.
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