Reserve Bank of India (Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation and Operation of Investment Portfolio Norms and Resource Raising Norms for All India Financial Institutions) Directions, 2023 – Amendment (Dated: February 17, 2025)

Posted On - 7 March, 2025 • By - Prasanna Katkam

Introduction

The Reserve Bank of India (RBI) has recently introduced an amendment to the Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation, and Operation of Investment Portfolio Norms, and Resource Raising Norms for All India Financial Institutions (AIFIs). The amendment, which comes into effect from April 1, 2025, provides a crucial relaxation by excluding specific long-term investments from the 25% Held to Maturity (HTM) ceiling. This move is expected to strengthen the financial system while fostering infrastructure development and economic stability.

Necessity of the Amendment

The financial sector plays a pivotal role in economic growth, and AIFIs serve as essential conduits for long-term funding. However, the previous regulations constrained AIFIs’ ability to hold long-term investments under the HTM category due to the 25% ceiling. Given their statutory mandates, AIFIs often invest in long-term bonds and debentures issued by non-financial entities, which are crucial for infrastructure projects and economic expansion.

Recognizing the need to provide more flexibility, the RBI reviewed the existing norms and amended the framework to exempt such long-term investments from the HTM ceiling. This change ensures that AIFIs can continue supporting critical sectors of the economy without being restricted by regulatory limits, ultimately enhancing credit flow to productive areas.

Significance of the Amendment

  1. Boost to Infrastructure Financing: AIFIs such as EXIM Bank, NABARD, NaBFID, NHB, and SIDBI play a crucial role in financing infrastructure projects. By removing long-term bonds and debentures from the HTM cap calculation, the amendment allows AIFIs to allocate more capital towards essential infrastructure, housing, and industrial growth initiatives.
  1. Enhanced Financial Stability: The move ensures that AIFIs are not forced to sell long-term investments prematurely due to regulatory constraints. This reduces volatility in financial markets and strengthens the overall stability of the banking and financial system.
  1. Alignment with Global Best Practices: The Basel III framework is designed to ensure financial institutions maintain robust capital structures while supporting economic growth. By adapting regulations to India’s unique economic landscape, the RBI reinforces its commitment to international standards while fostering domestic financial development.
  1. Greater Lending Capacity for AIFIs: With increased investment flexibility, AIFIs can better support small and medium enterprises (SMEs), housing projects, and export-import activities, which are essential for economic resilience and job creation.

Conclusion

This amendment marks a significant step in refining regulatory norms for AIFIs, ensuring that long-term investments critical to economic development are not hindered by restrictive caps. As the new directive comes into force on April 1, 2025, AIFIs should align their investment strategies accordingly. This move is expected to strengthen the financial system, promote economic stability, and enhance growth prospects in key non-financial sectors.