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Informist, Monday, Apr. 27, 2026

NEW DELHI – The Reserve Bank of India Monday issued final directions on the capital charge for credit risk for banks, which were largely unchanged from the draft norms released in October. On major heads, including government schemes, loans to individuals, and micro, small, and medium enterprises, the risk weights banks must assign for standard assets were left unchanged from the draft. Even for non-performing assets, the RBI has retained the risk weights from the initial proposal.

The final norms are applicable from Apr. 1. The RBI had sought comments on the draft norms by Nov. 30. The regulator received comments on 17 parameters, most of which it accepted, modified, or clarified. In addition to the risk weights, the supervisory haircuts on exposure and collateral were also unchanged from the draft. 

"Risk weighted assets shall be calculated as the product of the standardised risk weights and the exposure amount," the RBI said. "The exposures shall be risk-weighted net of specific provisions (including partial write-offs)." Banks must conduct due diligence at the point of origination and at least annually thereafter. These risk weights must align with the banks' internal credit assessments of the entity, the RBI said.

However, banks no longer necessarily have to increase a counterparty's risk weight by a notch from the "base" if due diligence indicates higher risk. At the same time, the due diligence cannot assign a risk weight lower than the applicable bank risk weight as per the external credit rating, the RBI said

Instead of using a standard probability-of-default system, the final norms said the sophistication of due diligence should match the size and complexity of a particular bank. Banks can use climate-related financial risks in their due diligence assessments. The RBI also mandated that banks conduct due diligence on the solo entity that they are lending to, even if it is part of a consolidated group. The group's financial support and potential adverse impact must also be assessed, the norms said. 

SOVEREIGNS, CENTRAL BANKS

Fund and non-fund claims on the central government, and central government-guaranteed claims, will attract a 0% risk weight. Exposures to the RBI and the Deposit Insurance and Credit Guarantee Corp. will also function at par with the Centre. Additionally, credit facilities extended under schemes guaranteed by the credit guarantee fund trust for micro and small enterprises, the credit risk guarantee fund trust for low-income housing, and certain schemes under the national credit guarantee trustee company that are backed by an unconditional and irrevocable guarantee from the government will be assigned a 0% risk weight. For the latter, the maximum permissible claim will be based on the lending institution's first-loss absorption.

Direct loans, credits, or overdraft exposures to state governments and investments in state government securities will also not require any risk weight. Claims guaranteed by state governments will attract a 20% risk weight, as will any claim on the Export Credit Guarantee Corp. of India. None of these norms has changed from the draft and will only apply to exposures denominated and funded in rupees, the RBI said.

Exposures to foreign sovereigns and central banks will be based on sovereign credit ratings, with the top credit rating of 'AAA' or 'Aaa' from the three major credit rating agencies assigned a 0% risk weight. Sovereigns rated below 'B' by S&P Global Ratings and Fitch Ratings shall attract the maximum risk weight of 150%, as will those rated below 'B3' by Moody's Ratings. Unrated sovereigns get a uniform 100% risk weight, the norms said. Indian banks can follow rules on credit rating assigned by a foreign sovereign to its banks and regional governments. Banks will not have to conduct due diligence on central banks and sovereigns.

Exposures to several multilateral development banks, including those of the World Bank Group, as well as to the Bank for International Settlements and the International Monetary Fund, will also be assigned a 0% risk weight. Such institutions not listed by the RBI in the final norms shall be risk-weighted based on ratings from S&P, Moody's, and Fitch, ranging from 20-150%, the Indian central bank said.

BANKS, CORPORATIONS

Banks' exposures to counterparty banks, excluding equity, capital instruments, and subordinated debt, shall be assigned a "base" risk weight. If the external rating category is 'AAA' or 'AA', the exposure will have a 20% risk weight. 'A'-rated exposures must have a 30% base risk-weight, followed by 50% for 'BBB' exposures and 100% for 'BB' and 'B' assets. Unrated exposures will also carry a 100% risk weight, while an asset rated below 'B' will have a risk weight of 150%, both as the base rate and for short-term exposure, the norms said. In a relaxation of the draft directions, the RBI allowed lending to foreign bank branches in India to be based on the parent bank's rating. 

Exposures with an original maturity of three months or less, and exposures arising from goods moving across national borders with an original maturity of less than three months, shall have lower risk weights, as they will be considered short-term exposures, the RBI said. 'AAA' to 'BBB'-rated assets will have a base risk weight of 20% while 'BB', 'B', and unrated short-term exposures shall have a risk-weight of 50%. All India Financial Institutions will be treated as banks for the purpose of calculating risk weights, the directions said.

Corporate entities, comprising financial or non-financial incorporated entities not otherwise captured in the directions, also get "base" risk weights, adjusted for one-year observed default rates. 'AAA' and 'AA' loans get a 20% risk weight, followed by 'A'-rated exposures at 50%, 'BBB' at 75%, and 'BB' at 100%, the same as unrated exposures. Below 'BB'-rated loans will carry a risk weight of 150%. Exposures to public-sector entities are counted as corporates as per the regulations. 

For short-term claims, corporates rated 'A1+' and 'A1' by an external rating agency shall be assigned a risk weight of 20%, going up to 150% for 'A4' and 'D' rated companies. A non-bank financial lender that is a core investment company will always carry a risk weight of 100%, the RBI said. 

Specialised lending subcategories, including project finance, will carry different risk weights, the regulator said. Objects and commodities finance shall be assigned a uniform risk-weight of 100%. Projects in the pre-operational phase will carry a risk weight of 130%, declining to 100% and 80% in the operational phase, depending on project quality. To obtain the lowest risk weight from the bank, the infrastructure project must be classified as a "high-quality" project with stringent norms after a year of satisfactory operation. These include rights to the creditor, such as restrictions on issuing additional debt without its permission. The borrower's revenue should also depend on a concession with contractual provisions for its rights from the central or state government, a public-sector entity, a statutory or regulatory body, or a corporate entity with a risk weight lower than 80%, the final norms said.

Equity exposures will carry a risk weight of 250%, rising to 400% if the loan is for a speculative unlisted equity instrument, the RBI said. Subordinate debt and other capital instruments shall attract a lower risk weight of 100%. Except for subsidiaries, the regulator said that any exposures to investments exceeding 10% of the paid-up common share capital of a non-financial entity shall be assigned a risk weight of 1250%.

RETAIL, MSME, REAL ESTATE

The risk weights on standard retail exposures are also unchanged from the draft. However, the central bank allowed the maximum aggregate exposure to a single counterparty under the regulatory retail portfolio to be INR 100 million, rather than INR 75 million in the draft. To be counted in the portfolio, loans must be to individuals or small businesses with a turnover of less than INR 5 billion. The products allowed in this category include lines of credit, term loans and leases, student and educational loans, and commitments and facilities.

Moreover, no single exposure may exceed 0.2% of the total portfolio. If the exposure satisfies all these criteria, banks can assign a risk weight of 75% of their regulatory retail portfolio. Unrated exposures to MSMEs that meet these criteria can also be added to the portfolio.

However, personal loans are assigned a risk weight of 125%, as are credit card receivables from those who have not repaid their monthly credit card debt within 12 months. Loans to individuals classified as capital market exposures also receive a risk weight of 125%. All other credit exposure to individuals, as well as microfinance loans, shall carry a risk weight on 100% for banks, the RBI said.

Other unrated MSME exposures shall be risk-weighted at 85%, but if the total exposure from the banking system exceeds INR 5 billion, the risk weight rises to 150%. Rated exposures to MSMEs shall be classified along with corporates, the rules said.

"The Reserve Bank may increase the standard risk weight for unrated MSME claims where a higher risk weight is warranted by the overall default experience," the norms said. The regulator would do this as part of its supervisory process.

For real estate exposures, banks shall put in place underwriting policies and value the property, assessing whether the borrower can repay. The bank's claims must be legally enforceable on the property, the RBI said. Housing loans with an 80-90% loan-to-value ratio to individuals with up to two loans would be a 40% risk weight for the bank, rising to 60% for individuals with three or more loans. A loan-to-value ratio will attract a minimum risk weight of 20% and 30%, respectively.

Commercial real estate exposures for acquisition, development, and construction shall be assigned a risk weight of 150%. The risk weight for residential housing is lower at 100%, the same as the draft norms. For other real estate claims, if a residential loan is repaid through other economic activity, banks shall apply risk weights of 20-40%. However, repayment planned from the sale of the underlying property will attract a maximum risk weight of 75%, with the minimum also rising to 30%. 

NPAs, UNHEDGED FX

Risk weights on non-performing, or stage 3, assets shall be calculated net of specific provisions for these, including partial write-offs. The unsecured portion of an NPA shall carry a 150% risk weight if the specific provision for it is less than 20%. A specific provision of more than 20% will bring down the risk weight for the bank to 100% and a provision of more than 50% will bring the risk-weight down to 50%.

The secured portion of the NPA will be calculated based on the eligible financial collateral defined in the norms, rather than other forms such as factors of products. Residential real estate exposures where repayments do not materially depend on cash flows from the property securing the NPA shall carry a risk weight of 100%, the RBI said. 

Unhedged foreign currency exposures will also attract incremental capital requirements, the regulator said. If the potential loss on the unhedged exposure exceeds 75% of the total expected earnings, banks must increase the risk weight by 25%. These will be netted against natural and financial hedges. 

MITIGATION OF CREDIT RISK

The RBI has left the haircuts for banks' risk mitigation on behalf of all the defined credit risks unchanged from the draft norms. Banks can hold securities issued or guaranteed by the Centre and states, units of mutual funds, cash in the same currency, and gold to mitigate the risks. Securitisation exposures in both sovereign and foreign debt may also be used to offset the impact, the final norms said. The regulator also outlined risk-mitigation techniques for banks, including on-balance-sheet netting and guarantees.

"The effects of CRM (credit risk mitigation) shall not be double-counted," the RBI said. "Therefore, no additional supervisory recognition of CRM for regulatory capital purposes shall be granted on claims for which an issue-specific rating is used that already reflects that CRM."   End

Reported by Aaryan Khanna

Edited by Saji George Titus

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