RBI Proposes 3.5% Leverage Ratio for Global Systemically Important Banks

The Reserve Bank of India (RBI) has proposed a minimum leverage ratio of 3.5% for banks it classifies as 'important' globally systemically important banks (G-SIBs). The draft framework, released on Friday, aims to align Indian rules with Basel III norms while adding a buffer for institutions whose failure could ripple through the global financial system.

Under the proposal, the leverage ratio—calculated as Tier 1 capital divided by total exposure—would apply to all banks designated as G-SIBs in India. For other banks, the existing requirement remains at 3%, but the RBI has kept the door open for a higher threshold if systemic risks build up.

What the leverage ratio means

The leverage ratio is a simple, non-risk-based measure that acts as a backstop to risk-weighted capital requirements. Unlike risk-weighted assets, which can be manipulated through internal models, leverage ratio uses total exposure—including off-balance sheet items—making it harder for banks to game.

For G-SIBs, the 3.5% requirement translates to a 50 basis point buffer over the standard 3% floor. This extra cushion is intended to absorb losses during periods of financial stress when asset values erode quickly.

The RBI's draft follows similar moves by global regulators, including the Basel Committee's guidance and the Financial Stability Board's recommendations. India currently has three G-SIBs: State Bank of India, ICICI Bank, and HDFC Bank—though the RBI has not named any specific institutions in the draft.

Why this matters for Indian banks

Indian G-SIBs have generally maintained leverage ratios above 4%, so the proposed 3.5% floor may not force immediate capital raising. However, the RBI has also proposed a 'higher loss absorbency' requirement, which could push the effective ratio higher depending on the bank's systemic importance bucket.

Analysts note that the proposal could disproportionately affect banks with large derivatives books or significant off-balance sheet exposures. For instance, a bank with sizable trade finance operations might need to hold more capital despite having a solid risk-weighted capital ratio.

The RBI has invited comments from stakeholders until September 2026, after which it will finalise the framework. The central bank has not yet specified a timeline for implementation, but market participants expect it to be phased in over 18-24 months.

Global context and next steps

The move aligns India with international practice, where regulators have imposed leverage ratio buffers on G-SIBs since the 2008 crisis. Countries like the US and UK already require 5% and 4.05% respectively for their largest banks, though those include additional systemic buffers.

For Indian banks, the immediate impact may be limited, but the proposal signals the RBI's intent to tighten supervision. It also sets a precedent for future capital requirements, especially if the central bank decides to extend the leverage ratio to other large lenders.

Banks and industry bodies are likely to submit detailed feedback during the consultation period, focusing on implementation challenges and potential overlaps with existing capital norms. The RBI will review these comments before issuing the final circular.

What to watch: whether the RBI raises the leverage ratio further for domestic systemically important banks (D-SIBs) in a future review, and how banks adjust their balance sheets to meet the proposed threshold.