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Informist, Tuesday, Oct. 7, 2025

 

MUMBAI – The Reserve Bank of India Tuesday released draft directions for a framework to calculate capital charges for credit risk for banks. The objective of the framework is to enhance its robustness, granularity, and risk sensitivity. The central bank has sought public comments on the draft by Nov. 30. "The key intention of the revised framework is to ensure prudent and credible calculation of risk weighted assets that would facilitate arriving at capital ratios for banks in a comparable and risk-sensitive manner," the central bank said.

 

Under the draft norms, the banks will be required to conduct thorough due diligence to gain adequate understanding of their counterparties' risk profiles and characteristics, both at the time of origination and on a regular basis, at least annually. For exposures to entities that are part of consolidated groups, banks must perform due diligence at the individual entity level to which they have a direct credit exposure, the RBI said.

 

Lenders must conduct due diligence to ensure that external ratings accurately and conservatively reflect the creditworthiness of their counterparties. "If the due diligence analysis carried out by the bank reflects higher risk characteristics than that implied by the external rating bucket of the exposure, bank may assign a risk weight at least one bucket higher than the "base" risk weight determined by the external rating," the RBI said in the draft.

 

Claims on the central government, including fund-based and non-fund-based claims, will attract 0% risk weight, as will central government-guaranteed claims. Direct loans, credits, or overdraft exposures to state governments and investments in state government securities will also attract 0% risk weight, as per the draft norms.

 

Additionally, credit facilities extended under schemes guaranteed by credit guarantee fund trust for micro and small enterprises, credit risk guarantee fund trust for low income housing, and certain schemes under national credit guarantee trustee company that are backed by an unconditional and irrevocable guarantee from the government will attract 0% risk weight to the extent of the guarantee coverage. The claims on Export Credit Guarantee Corp. of India shall attract a risk weight of 20%.

 

According to the draft norms, the bank's exposures to foreign sovereigns and foreign central banks will be assigned risk weights based on the ratings given to those sovereigns or central banks by international rating agencies. Exposures to counterparty banks excluding equity, capital instruments, and subordinated debt, should be based on the external credit risk assessment approach for rated exposures, and the standardised credit risk assessment approach for unrated exposures.

 

The lender's exposures to corporate that are classified as micro, small, and medium enterprise where it is part of a group with consolidated annual sales exceeding INR 5 billion, the lender's exposure to the MSME will attract the risk weight applicable to corporate exposures. The RBI reserves the right to increase the standard risk weight for unrated MSME claims based on default experience.

 

For real estate exposures, banks must establish underwriting policies that assess a borrower's ability to repay mortgage loans. "Underwriting policies must define metric(s) such as the loan's debt service coverage ratio, debt service-to-income ratio, and specify its (their) corresponding relevant level(s) to conduct such assessment. Underwriting policies must also be appropriate when the repayment of the mortgage loan depends materially on the cash flows generated by the property, including relevant metrics (such as an occupancy rate of the property and likely income)," the draft said.

The unsecured portion of non-performing assets will be risk-weighted based on the level of provisioning. If specific provisions are less than 20% of the outstanding NPA amount, a 150% risk weight will apply.  End

 

Reported by Vaishali Tyagi

Edited by Ashish Shirke

 

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