The Reserve Bank of India (RBI) issued final directions on Monday for risk weights on retail, corporate and sovereign exposures, linking capital requirements more closely to borrower risk profiles. According to The Economic Times, the norms are effective April 1, 2027, and are expected to optimise capital allocation across the banking system.
Under the revised framework, both fund-based and non-fund-based exposures can qualify as part of the regulatory retail portfolio and attract a 75% risk weight. As reported by The Economic Times, eligible loans must be extended to individuals or small businesses with turnover up to ₹500 crore, fall under standard retail products, remain within a ₹10 crore exposure cap per borrower, and form part of a diversified portfolio where no single borrower accounts for more than 0.2%. The RBI has extended favourable treatment to credit card receivables that are fully paid before the due date, effectively lowering their capital charge and encouraging timely repayments while distinguishing them from riskier revolving balances.
The central bank has tightened exclusions, keeping most personal loans, non-transactor credit card dues, capital market exposures, derivatives and real estate-linked loans outside the regulatory retail category. These exposures will attract higher capital requirements. Unsecured personal loans and revolving credit card balances will continue to carry a 125% risk weight, while other retail exposures that do not meet the qualifying criteria will generally attract a 100% risk weight. The RBI has retained the flexibility to increase the 75% risk weight for specific banks if asset quality deteriorates.
For housing loans, the norms introduce a loan-to-value (LTV)-linked framework, with lower risk weights of 20-40% for individual borrowers, reflecting relatively low stress in the segment. However, higher risk weights have been prescribed for borrowers with multiple housing loans, as well as for real estate exposures more broadly, with residential and commercial real estate attracting 100% and 150% risk weights, respectively. This differentiated approach recognizes the varying risk profiles across different real estate segments.
The RBI has introduced specific risk weight frameworks for Micro, Small and Medium Enterprises (MSMEs) exposures, recognizing their varying risk profiles. Fully secured MSME exposures will be risk weighted as per the real estate asset class framework, while unrated MSME exposures meeting regulatory retail criteria will attract a 75% risk weight. Other unrated MSME exposures not meeting regulatory retail criteria will be risk weighted at 85%, with exposures exceeding ₹500 crore aggregate exposure from the banking system attracting a 150% risk weight. The RBI retains flexibility to increase standard risk weights for unrated MSME claims based on default experience and supervisory review processes.
The comprehensive directions establish a standardised approach (SA) for credit risk management, replacing previous frameworks with a unified system effective April 1, 2027. The RBI has mapped credit ratings from domestic agencies to specific risk weights, with AAA rated exposures receiving the lowest risk weights and unrated exposures attracting higher capital requirements. The framework includes detailed provisions for non-performing assets (NPAs), foreign currency exposures, and sovereign exposures, ensuring comprehensive coverage of all banking risks. Banks must implement due diligence systems to ensure adequate understanding of counterparty risk profiles and maintain risk weights aligned with internal credit assessments.
