The Reserve Bank of India has proposed a revised framework governing how commercial banks must set aside capital against the risk of losses on their derivative trades, replacing rules that have been in place since 2011. According to reports from Business Standard, the draft framework will apply to all commercial banks, excluding small finance banks, payments banks and local area banks. The rules are proposed to take effect from 1 April 2027, and comments have been invited from banks, market participants and other stakeholders until 28 August 2026. The central bank said the draft norms aim to make the capital requirement for derivative exposures more risk-sensitive and aligned with global Basel III standards, introducing a more risk-sensitive capital regime for derivative exposures.
At the centre of the framework is credit valuation adjustment (CVA) — an adjustment banks make to the price of a derivative contract to account for the possibility that the counterparty on the other side of the trade could default. As reported by Business Standard, the capital charge ensures that banks set aside enough capital to cover such potential losses. Under the proposed rules, banks will be required to use the basic approach for CVA (BA-CVA) to compute their capital charge, with a choice between a 'full' and a 'reduced' version. CVA reflects the adjustment made to the default risk-free value of derivative contracts to account for the possibility that a counterparty may default before the contract matures. Since movements in counterparties' credit quality can significantly affect the value of derivatives, banks are required to maintain capital against such risks to safeguard financial stability.
Banks with a relatively small derivatives book — where the aggregate notional amount of non-centrally cleared derivatives is ₹10 lakh crore or less — can skip the BA-CVA computation altogether. According to the draft rules reported by Business Standard, such banks can set their CVA capital requirement equal to 100 per cent of their capital requirement for counterparty credit risk, though they will not be allowed to recognise any CVA hedges under this simpler treatment. The RBI's supervisory arm can still deny a bank this option if it finds that the bank's CVA risk is material to its overall risk profile. The proposed instructions allow eligible banks to choose a simpler approach, with the central bank clarifying that a bank whose aggregate notional amount of non-centrally cleared derivatives is less than or equal to ₹10 lakh crore may opt not to calculate its CVA capital requirements using the BA-CVA and instead choose an alternative treatment.
The draft rules also introduce a more granular set of supervisory risk weights that banks must apply to counterparties based on the counterparty's sector and credit quality. As reported by Business Standard, sectors such as financials attract a risk weight of 5 per cent for investment-grade counterparties and 12 per cent for others, while sovereigns attract the lowest weights of 0.5 per cent and 2 per cent, respectively. The existing framework was based on global standards issued by the Basel Committee on Banking Supervision (BCBS) in 2010, which the RBI has now updated to align with revised BCBS guidelines as part of the final Basel III framework. The draft further clarifies the eligibility and recognition of CVA hedges and proposes greater differentiation in supervisory risk weights based on counterparties' sector and credit quality, with these changes expected to improve the accuracy of capital requirements by better reflecting the underlying risk profile of derivative counterparties.
Alongside the derivative framework, the RBI has introduced significant changes to other banking regulations. The central bank has eased priority sector lending rules for banks raising FCNR(B) and NRE deposits under its special window, with the PSL amendment coming into force with immediate effect. Under the revised framework, advances extended in India against fresh FCNR(B) deposits with a tenor of three to five years, mobilised between June 8 and September 30, 2026, will be excluded from the calculation of Adjusted Net Bank Credit (ANBC). Similarly, advances against fresh NRE term deposits of three years or more, mobilised between June 19 and September 30, 2026, will qualify for the exclusion. The RBI has also proposed new leverage ratio norms aligned with global Basel standards, retaining the minimum leverage ratio at 4% for Domestic Systemically Important Banks (D-SIBs) and 3.5% for other banks. These additional frameworks are designed to provide banks with greater flexibility while maintaining robust risk management standards across multiple banking operations.
