RBI Finalises Basel III Leverage Ratio Rules: 4% for D-SIBs, SA-CCR Alpha 1.4 From April 2027

The Reserve Bank of India on 23 October 2026 issued the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Eleventh Amendment Directions, 2026 (RBI/2026-27/297, DOR.CAP.REC.251/21-02-002/2026-27), replacing the leverage ratio framework in Chapter VII of the Capital Adequacy Directions, 2025 with the Basel Committee's Leverage Ratio 2017 Standard. The new rules apply to commercial banks from 1 April 2027. Minimum ratios are set at 4% for domestic systemically important banks (D-SIBs) and 3.5% for other banks, but almost everything that feeds the denominator has been rewritten: derivatives, repos, unsettled trades, cash pooling and off-balance sheet items.

The final text follows a draft the RBI released on 7 August 2026, on which it took comments until 28 August 2026. According to the RBI press release of 23 October 2026, the feedback led to consequential changes in the final directions, and a statement on the comments received is annexed to that release. The press release on the August draft carries the original proposal for anyone who wants to compare the two versions.

The date matters because it is shared. The RBI has already fixed 1 April 2027 for the Basel III market risk capital framework finalised in September and for the standardised approach to operational risk capital. Banks, and the auditors who sign off their capital returns, now face three reworked capital calculations going live together, and the leverage ratio cross-refers to the others: the maturity factor for margined derivatives comes from the Forthcoming Instructions Amendment Directions, 2026, and credit conversion factors come from the Credit Risk Standardised Approach Directions, 2026.

Leverage ratio minimums and the G-SIB buffer for foreign bank branches

The ratio is the capital measure divided by the exposure measure, expressed as a percentage. Paragraph 262 sets the minimums at 4% for D-SIBs and 3.5% for all other banks, and requires them to be met at all times. Both the capital measure and the exposure measure are calculated on a quarter-end basis. A bank may use daily or monthly averaging only with RBI approval and must then apply that method consistently.

Branches in India of global systemically important banks (G-SIBs) must hold 3.5% plus the applicable G-SIB leverage ratio buffer, including any additional buffer set by the home regulator. A branch that falls short of the buffer faces restrictions on distributing earnings, judged together on its CET1 risk-based ratio and its Tier 1 leverage ratio. For a G-SIB in the first higher loss absorbency bucket, with a 1% G-SIB buffer, the notification prescribes these minimum capital conservation ratios:

The CET1 side of that test is built from the 5.5% minimum, the 2.5% capital conservation buffer, the G-SIB higher loss absorbency requirement and the countercyclical buffer where it applies. Under paragraph 263(1), the scope of consolidation for the leverage ratio is the same as for the risk-based framework under paragraph 8 of the Directions.

Exposure measure: gross values, no netting, Tier 1 deductions taken out

Paragraph 265 lays down the general rule. Exposures are taken at gross accounting values, and neither credit risk mitigation nor netting of assets against liabilities is allowed unless the Directions say so. Total exposure is the sum of four blocks: on-balance sheet items other than derivatives and securities financing transactions (SFTs), derivatives, SFTs, and off-balance sheet items. Failed trades and long settlement transactions go into whichever block their accounting classification points to.

Items deducted from Tier 1 capital, such as investments in unconsolidated financial entities and prudent valuation adjustments on less liquid positions, are also removed from the exposure measure, so the numerator and denominator stay consistent. Liability-side adjustments are not deducted, which means fair value gains or losses from a bank's own credit risk stay in. Traditional securitisations that meet the risk transference requirements in paragraph 96 can be excluded, with retained positions counted; synthetic securitisations stay in the measure.

Two provisions give the RBI room to act. Banks must watch for transactions that understate leverage, and the RBI may respond with supervisory action including a Pillar 2 capital charge. Separately, in exceptional macroeconomic circumstances the RBI may temporarily let banks exclude central bank reserves, but it will raise the minimum ratio to offset that relief, and banks must disclose the effect.

On the balance sheet itself (paragraph 266), non-derivative assets are counted at accounting value net of specific provisions, and general provisions that have reduced Tier 1 are also deducted. Fiduciary assets can be left out only if they meet derecognition criteria. Two operational points need attention in bank accounting teams:

• Under trade date accounting, any offsetting of cash receivables and payables on unsettled purchases and sales must be reversed. Offsetting survives only where the assets are fair valued through income, held in the trading book and settled on a delivery-versus-payment basis.
• Cash pooling arrangements can be shown net, with individual accounts treated as extinguished, only where the daily or conditional transfer criteria in conditions (a) to (e) are met.

Derivatives under SA-CCR: alpha of 1.4 and cash variation margin

Banks still on the Current Exposure Method continue under paragraph 267, with a modification. Banks on the Standardised Approach for Counterparty Credit Risk (SA-CCR) use the new paragraph 267A, where exposure equals 1.4 multiplied by the sum of replacement cost (RC) and potential future exposure (PFE). The PFE multiplier is fixed at one. Written options are included even where the risk-based rules would treat them as zero exposure, and cross-product netting is barred unless a qualifying cross-product netting agreement exists.

Replacement cost is the market value less eligible cash variation margin received plus eligible cash variation margin provided, floored at zero. Non-cash collateral received cannot be netted against the exposure; its only effect is through the maturity factor in PFE. Where posting collateral reduced the bank's balance sheet assets, the exposure is grossed back up.

Cash variation margin reduces RC only if five conditions are all met: for trades not cleared through a qualifying central counterparty (QCCP), the recipient faces no legal or contractual restriction on using the cash; margin is calculated and exchanged at least daily on mark-to-market values; the currency is specified in the governing agreement; the amount covers the full mark-to-market exposure, subject to thresholds and minimum transfer amounts; and a single legally enforceable master netting agreement covers both the derivatives and the margin. Undisputed amounts may be recognised during a dispute. A bank that has booked posted margin as a receivable may deduct that receivable and pick up the margin in RC instead.

An illustration with assumed figures shows why the margin conditions matter. Take a netting set with a positive market value of ₹120 crore, eligible cash variation margin received of ₹80 crore and an aggregate PFE add-on of ₹50 crore. RC is ₹120 crore minus ₹80 crore, or ₹40 crore. PFE is 1 × ₹50 crore. Exposure is 1.4 × (₹40 crore + ₹50 crore) = ₹126 crore. If the margin fails even one condition, for example because it is exchanged weekly, RC rises to ₹120 crore and exposure becomes 1.4 × ₹170 crore = ₹238 crore. For a bank with Tier 1 capital of ₹9,000 crore and a total exposure measure of ₹2,40,000 crore, the ratio is 3.75%, which clears the 3.5% floor for an ordinary bank but falls short of the 4% required of a D-SIB. An extra ₹112 crore of derivative exposure moves that ratio by well under a basis point, but the same failure repeated across a large derivatives book is what pushes a bank close to its minimum.

Client clearing and written credit derivatives

A clearing member can exclude its exposure to a QCCP on client trades only where the four conditions in paragraph 267A(6)(i) are met, covering segregation, legal enforceability, likelihood of porting and the absence of any obligation to reimburse the client. Initial margin counted in the calculation must be appropriately segregated. Where a clearing member guarantees a client's performance to the CCP, it treats the exposure as if it had entered the trade directly. Affiliates outside the consolidation scope may be treated as clients.

Written credit derivatives are included at their effective notional amount, reduced by any negative fair value changes already taken through Tier 1 but not below zero, and capped at the maximum potential loss. Purchased protection on the same reference name can offset that amount if material terms, maturity and counterparty correlation conditions are met, and two names count as identical only if they are the same legal entity. The portion not offset may be excluded from the PFE calculation.

Repo, reverse repo and other securities financing transactions

Under paragraph 268, a bank acting as principal includes gross SFT assets without accounting netting and leaves out securities received that sit on its balance sheet. Cash payables and receivables with the same counterparty may be netted only where they share a final settlement date, the right to set off is legally enforceable in default, insolvency and bankruptcy, and settlement is net or through an equivalent mechanism.

A counterparty credit risk add-on is then computed as the excess of exposure over collateral, floored at zero, for each netting set under a qualifying master netting agreement, or for each transaction where there is none. Transactions recorded under sale accounting must be reversed and treated as financing. Securities placed with triparty agents count only up to the amount actually lent. A bank acting as agent that indemnifies only the gap between the value lent and the collateral gets limited treatment; one economically exposed beyond that indemnity carries the full exposure. The notification works through an example between two banks to show these steps.

Off-balance sheet items and credit conversion factors

Paragraph 269 covers commitments including liquidity facilities, direct credit substitutes, acceptances, standby letters of credit and trade letters of credit. Notional amounts are multiplied by the credit conversion factors in Table 19 of paragraph 22 of the Credit Risk Standardised Approach Directions, 2026, but the transition period at serial number 9 of that table does not apply for leverage ratio purposes, so banks cannot borrow the phase-in. A 100% factor applies to unsettled purchases of financial assets under settlement date accounting (subject to the same offsetting conditions as for trade date accounting) and to credit substitutes not covered elsewhere. Specific and general provisions held against off-balance sheet exposures may be deducted, without taking the block below zero. An item that accounting standards treat as a derivative is measured as a derivative.

Quarterly disclosure in Templates LR1 and LR2

Paragraph 270 requires banks to publish the Basel III leverage ratio every quarter on both standalone and consolidated bases, report it each quarter to the RBI's Department of Supervision with detailed workings for the capital and exposure measures, and make Pillar 3 disclosures in Templates LR1 and LR2 of Annex III. Paragraph 4 of Annex III has been replaced with new guidelines and paragraph 271 has been deleted.

Because the measures are calculated at quarter-end from 1 April 2027, the first calculation under the new framework falls at the quarter ending 30 June 2027. Before then, treasury and finance teams will need to rerun derivative exposures on the SA-CCR basis with the 1.4 alpha, test each margin agreement against the five cash variation margin conditions, reverse netting on unsettled trades and cash pools that do not qualify, and remap off-balance sheet items to the new credit conversion factors without transition relief. Bank auditors reviewing capital disclosures for 2026-27 should expect parallel runs and should ask for them. The notification does not separately address small finance banks, payments banks, regional rural banks or local area banks, so those entities will be looking for a clarification on whether the revised Chapter VII reaches them.

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