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Informist, Wednesday, Oct. 7, 2026

--RBI issues final norms on credit valuation adjustment framework 

--RBI: Final norms on credit valuation adjustment framework effective Apr 1
 

NEW DELHI – The Reserve Bank of India Wednesday announced final norms under the credit valuation adjustment framework, under which banks will have to maintain adequate capital to cover potential losses on certain financial contracts such as a derivative or a Security Financing Transaction when the financial condition of the other party weakens. Under the framework, banks will have to enhance the risk sensitivity of supervisory risk weights for counterparties by sector and credit quality, which is aligned with the final Basel-III norms. 

The new framework, which will be effective from Apr. 1, allows banks to adopt the basic approach recommended by the Basel Committee on Banking Supervision and will replace domestic guidelines effective since 2011. The adjustment is the capital charge for banks to hold in case a counterparty defaults on a derivative. The capital requirement ensures that banks have sufficient funds to absorb such risks. 
 

The norms clarify the eligibility and recognition of credit valuation adjustment hedges, increase the sensitivity of supervisory risk weights for counterparties by sector and credit quality, and separate systematic and idiosyncratic credit valuation adjustment risk components in the full Basic Approach for Credit Valuation Adjustment calculation, the RBI said.

Under the framework, the amount of capital that a bank will have to set aside takes into account the sector and credit quality of the other party. A counterparty with weak credit quality or if it is not rated, may need higher risk capital to be set aside. The prescribed risk weight when the counterparty is a sovereign, including central banks and multilateral development banks with a credit rating of 'BBB-' or 'Baa3', is 0.5%. If the credit rating is below 'BBB-' or 'Baa3', the risk weight is 2.0%, the central bank said. 

"In case a counterparty has more than one credit rating, the worst of the ratings shall be used to decide on the credit quality and resultant risk weight," the RBI said. "Where there are three or more ratings with different risk weights, the ratings corresponding to the two lowest risk weights should be referred to, and the higher of those two risk weights shall be applied."

The central bank has also announced a simpler calculation method for banks whose total amount of non-centrally cleared derivatives is less than or equal to INR 10 trillion. "Provided that the supervisory authority may not permit this option for a bank if it determines that CVA risk resulting from the bank's derivative positions materially contributes to the bank's overall risk," it added. 

The RBI had issued draft norms on the credit valuation adjustment framework on Aug. 7 and had sought feedback by Aug. 28. The RBI did not accept any of the feedback received on the draft norms, including the feedback of pushing back the implementation of the final norms to Apr. 1, 2028.  End

Reported by Priyasmita Dutta

Edited by Avishek Dutta

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