09 July 2012

The Chief Executive  Officers
Foreign Banks Operating  in India

Dear Sir,

Prudential Guidelines on  Capital Adequacy – Treatment of Head Office Debit  Balance – Foreign Banks

A reference is invited to the paragraph 4.2.3 – Notes (iv) of the Master  Circular on Capital Adequacy and Market Discipline- New Capital Adequacy  Framework (NCAF) dated July 2, 2012, wherein it is mentioned that ‘the net credit  balance, if any, in the inter-office account with Head Office/overseas branches  will not be reckoned as capital funds. However, any debit balance in the Head  Office account will have to be set-off against capital.’

2. A few banks represented that debit  balances in the Head Office account due to placements with the Head Office/overseas  branches may happen as a part of normal banking business and complete denial of such exposure may not be practical and consistent with the principle of   non-disruptive regulation. Accordingly, the matter has been examined and it is advised that:

  1. If net overseas placements with Head  Office/other overseas branches/other group entities (Placement minus  borrowings, excluding Head Office borrowings for Tier I and II capital purposes)  exceed 10% of the bank’s minimum CRAR requirement, the amount in excess of this  limit would be deducted from Tier I capital.
  2. For the  purpose of the above prudential cap, the net overseas placement would be the  higher of the overseas placements as on date and the average daily outstanding  over year to date.
  3. The overall cap on such placements/investments will  continue to be guided by the present regulatory and statutory restrictions i.e. net open position limit and the gap limits approved by the Reserve Bank of  India, and Section 25 of the Banking Regulation Act, 1949. All such   transactions should also be in conformity with other FEMA guidelines.

3. These guidelines will be effective from  September 30, 2012.

Yours faithfully,

(Deepak Singhal)
Chief General Manager-in-Charge

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