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Sharper Risk Weights, Stricter Capital Norms: Indian Banks Set for Major Regulatory Shift
(Anytime News Network | Pooja Srivastava)
India’s central bank, the Reserve Bank of India (RBI), has released draft directions on “Capital Charge for Credit Risk – Standardised Approach,” marking a significant regulatory overhaul aimed at strengthening the resilience of the banking system. The move aligns with global reforms introduced by the Basel Committee on Banking Supervision (BCBS) under the Basel III framework.
The proposed framework seeks to enhance the accuracy, transparency, and comparability of risk-weighted asset (RWA) calculations across banks. By mandating the Standardised Approach (SA) for credit risk, RBI aims to ensure that capital adequacy ratios are computed in a more risk-sensitive and credible manner.
According to the draft, the new norms will come into force from April 1, 2027, and will apply to all Scheduled Commercial Banks, excluding Small Finance Banks, Payments Banks, and Regional Rural Banks. The initiative reflects RBI’s commitment to aligning India’s banking regulations with international best practices while safeguarding depositor interests.
A key feature of the framework is the classification of exposures into multiple categories, including sovereigns (domestic and foreign), public sector entities, multilateral institutions, banks, corporates, MSMEs, retail portfolios, real estate, and non-performing assets (NPAs). Each category will carry differentiated risk weights, allowing for a more granular and realistic assessment of credit risk.
The draft also introduces the concept of “transactors,” referring to credit card or overdraft customers who have consistently repaid dues in full over the past 12 months. These borrowers are likely to be treated as lower-risk, reflecting disciplined financial behavior.
Additionally, the framework covers complex areas such as off-balance sheet exposures, securitisation positions, and unhedged foreign currency exposures. It also strengthens the role of external credit rating agencies by defining eligibility criteria and mapping processes for risk weight assignment.
The credit risk mitigation section outlines principles for legal certainty, collateral usage, guarantees, and on-balance sheet netting, providing banks with structured mechanisms to manage and reduce risk exposures effectively.
Overall, the draft directions signal a transformative shift in India’s banking regulation landscape, aiming to build a more robust, transparent, and globally competitive financial system.
